) may well have to bear the brunt of the U.S. debt deal, which
plans to cut government spending by $2.1 trillion over the next 10
years. This includes a planned cut of $350 billion in the U.S.
defense budget, a figure that many speculate will rise further. For
Boeing, this can translate to reduced government contracts and more
stringent Federal procurement policies both of which can hurt
revenues and margins for its defense, space and security
division. Boeing competes in the commercial aircraft market
with aerospace giant Airbus as well as Embraer and Bombardier. The
company also competes in the defense segment with large defense
contractors such as Lockheed Martin (
), Northrop Grummann (
) and BAE Systems.
We currently have a
price estimate of $91 for Boeing's stock
, which is roughly 35% above the current market price. We currently
estimate that Boeing's U.S. defense, space and security division
constitutes about 30% of this price.
Wait! Has this Defense Cut Already been Accounted
The projected $350 billion cut through the debt deal is already
in line (in fact $50 billion lower) with Obama's previous
announcement of $400 billion in defense cuts for the next 12 years.
However, further defense cuts are possible when the so-called
"Super Congress" meets. This group will determine where in the
government the next $1.2 trillion spending cuts will come from.
This could have further potential to push spending cuts in the
Pentagon to over $500 billion and above the current estimate (only
if the Super Congress fails to reach an agreement). These risks
could have a downside to the total defense contract spending by the
U.S. government, which we currently estimate to be relatively flat
What Does This Mean for Boeing?
Boeing's stock has slid by about 10% since July 28th. We believe
that negative speculation over government spending cuts is a
contributor to this decline. However, we believe that fundamental
growth drivers such as the 787 Dreamliner orders & production,
Boeing 737 orders, and Boeing's $35 billion mega-contract on the
aerial refueling tanker still show promise for maintaining a
healthy backlog of orders in future. Having said that, the
termination of certain key contracts cannot be ruled out in the
near future as further deficit reduction measures are put in place
by the Congress.
See our full analysis for Boeing