Boeing Follows Budget Cut Trends - Analyst Blog


Chicago-based Aerospace and Defense company The Boeing Company ( BA ) has decided to shut down its Boeing Defense, Space & Security ("BDS" ) facility in Wichita by the end of 2013 on the back of continuous reduction in U.S. defense spending and after a thorough assessment of current and future market environment.

The company indicated that contracts at Wichita are complete and the programs at the site have come to a close. The company also believes that the plant does not have sufficient sustainable business prospects that would generate an affordable cost structure to maintain and win new business and ensure adequate returns. Therefore, in order to remain competitive, the company has decided to shut down the facility.

The closure will affect more than 2,160 employees who are currently employed in the facility. However, the company does not expect job cuts to take place until early third quarter of 2012. The company is able to identify the problems that will be faced by the highly-skilled employees of the plant and will therefore render every possible assistance to them.

The Wichita plant is the base for the company's Global Transport & Executive Systems business and its B-52 and 767 International Tanker programs. It also provides support for flight mission planning and integrated logistics for the company. Going forward, the company plans to continue its aircraft maintenance, modification and support work, engineering work and work on its tanker programs at its other facilities.

The Boeing Company is among the best positioned in its sector, owing to its balanced exposure to commercial aircraft and defense equipment. We believe that the growth momentum will be maintained by planned production rate increases and a globally diversified customer base.

However, our concerns for the company, in the near term, border on theheadwinds faced by the global airline industry coupled with the expected cutbacks in the US defense budget. Currently, the Pentagon faces more than $450 billion in cuts in the next 10 years.

Another $500.0 billion in cuts could be looming in 2013 after presidential and congressional elections in 2012 as the congressional committee failed to act on budget savings in 2011. The Obama administration is likely to reveal its military spending plan on January 5, 2012. It is expected to reduce troops to cope with the huge budget cuts over the next decade.

Moreover, the decline of the company's defense backlog is also a matter of concern. Defense backlog in third quarter of 2011 declined to $59 billion from $65.6 billion in the prior-year period due to run-off of multi-year contracts.

The company presently retains a short-termZacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

Boeing Company is a premier jet aircraft manufacturer and one of the largest defense contractors in the U.S. The company's customers include domestic and foreign airlines, the U.S. Department of Defense ("DoD" ), the Department of Homeland Security, the National Aeronautics and Space Administration ("NASA"), other aerospace prime contractors, and certain U.S. government and commercial communications customers. The company mainly competes with Lockheed Martin Corporation ( LMT ) and Northrop Grumman Corporation ( NOC">NOC ).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: BA , LMT , NOC

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