- U.S. defense spending is declining which is impacting sales
at Boeing's defense business
- As a result, the company is increasing its focus on
international defense sales
- Boeing's international defense sales are growing driven by
rising defense spending from emerging countries like India,
Korea and Brazil
) sale of military aircraft and other defense related products to
the U.S. government is coming under pressure from declining U.S.
defense spending. Currently, the U.S. government plans to cut its
defense spending by $487 billion over a 10-year period starting
from government fiscal year 2012. This decline will impact Boeing
severely as sales from the U.S. government constitute nearly 83% of
its total defense sales.
However, to counter the negative impact from declining U.S.
defense spending, Boeing is increasingly focusing on growing its
international defense sales. Defense spending from emerging
countries like India, Korea and Brazil has been rising, and all of
these countries have defense engagement agreements with the U.S.
which will benefit Boeing.
The defense business constitutes around 40% of Boeing's total
value according to our estimates. We currently have
price estimate of $75 for Boeing
, approximately in line with its current market price.
our complete analysis of Boeing here
Declining U.S. defense sales
From 2009 to 2012, Boeing's defense sales from the U.S.
government contracted by 8%. The company anticipates this trend to
continue for the foreseeable future and accordingly has
forecast its defense sales to contract between 3% and 6% in 2013 on
a year-over-year basis.
However, the decline in Boeing's U.S. defense sales is being
partially offset by growth in international defense sales. From
2009 to 2012, Boeing's sale of military hardware and services to
international governments and alliances like NATO increased by 31%.
This growth in international defense sales was driven by rising
defense spending by major Asian countries like India, Japan and
Korea and other emerging countries like Brazil.
Over the past decade, defense spending from India, Japan and
Korea has increased at a rate higher than 3.5% per year. Boeing has
won several large contracts from these countries and is therefore
focusing more on these regions. In mid 2012, Boeing finalized its
order with India for 10 C-17 airlifters in a deal valued at over $2
billion. This order made India C-17′s largest international
customer, surpassing the United Kingdom which has 8 C-17s in its
Boeing is also in the process of delivering eight
P8I maritime reconnaissance and anti-submarine warfare
aircraft to the Indian Navy. The company also submitted its H-47
Chinook for the heavy-lift helicopter competition in India and
proposed its AH-64 Apache for Indian Air Force's next attack
helicopters. Both these deals are estimated at over a billion
All in all, Boeing's growing international defense sales driven
by rising defense spending by emerging countries will help Boeing
reduce the impact from declining U.S. defense spending. In the
process, international defense sales will become increasingly
important for the company.
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