1 Oct

Boeing Gets Major Defense Order amid MAX Crisis

WRITTEN BY Anirudha Bhagat

Amid ongoing troubles with its 737 MAX commercial planes, Boeing (BA) has received some positive news: $2.9 billion in orders from the US Department of Defense. On September 27, the US Air Force (or USAF) awarded Boeing a $2.6 billion contract to build 15 KC-46 jets, adding to the USAF’s earlier request for 179 KC-46 aircraft. These contracts could offset some of the losses Boeing has suffered due to delivery delays.

Boeing KC-46 defense order

The USAF ordered 179 KC-46s in February 2011, and Boeing was to deliver the first lot in August 2017. However, due to technical glitches, the model couldn’t get final approval for more than two years. After making the required changes, Boeing won regulatory approval in February 2019.

According to Boeing’s 10-K filing, it incurred a total cost overrun of $3.6 billion between 2016 and 2018. Therefore, the new KC-46 contract could revive its incremental cash flow and revenue.

The KC-46 is a military transport and aerial refueling jet developed on Boeing’s 767 jetliner mainframe. The twin-aisle air-refueling tanker is powered by United Technologies’ (UTX) PW4062 engines.

Other major defense orders

Boeing has also received various small defense orders worth over $200 million in total. On September 27, it was awarded $46.7 million in new Department of Defense contracts. And on September 30, it received $184.2 million more in defense orders.

The aero-defense giant is also set to benefit from United Launch Services’ $1.2 billion defense order win. United Launch Services is a 50-50 joint venture between Boeing and Lockheed Martin (LMT).

Boeing needs defense boost

New orders could boost Boeing’s defense revenue, which accounted for 23% of the company’s total revenue last year. The 737 MAX fiasco makes these orders especially important.

Due to the MAX planes’ worldwide grounding since the Ethiopian Airlines crash on March 10, Boeing’s overall commercial aircraft deliveries fell 54% year-over-year in the second quarter. As a result, its commercial aircraft revenue plunged 66% YoY.

Nonetheless, the company’s defense segment continues to perform well. In Q2, the business unit’s sales rose 8% YoY, mainly driven by higher weapon, derivative jet, and satellite shipments.

At the end of the second quarter, Boeing had an order backlog of $64 billion for its defense equipment. In the third quarter, the company won approximately $5 billion in defense contracts. It received contracts worth $275 million in July, $1.8 billion in August, and $2.9 billion in September. New defense contracts could ensure long-term cash flow and revenue for the company.

Boeing’s stock performance

Defense orders could provide some respite for Boeing stock, which has fallen significantly since the Ethiopian Airlines crash. Since March 10, the stock has lost 10% ($24 billion) of its market capitalization. As of March 8, it was the top Dow Jones 30 stock, with a YTD (year-to-date) return of 31%. As of September 30, Boeing stock’s YTD gain had eroded to 18%, placing it 16th among Dow Jones 30 components.

Boeing stock has underperformed the S&P 500 and the iShares US Aerospace & Defense ETF (ITA), which are up 18.7% and 30% YTD, respectively. Furthermore, due to the 737 MAX crisis, several analysts have downgraded Boeing stock and reduced its target price. Boeing’s percentage of bullish analysts has reduced to 62% from 77% before the Ethiopian Airlines crash. Moreover, two analysts have turned bearish on the stock. Their average target price for BA has fallen to $411.14 from $440.

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