Defense Cuts May Loom Large over Boeing as U.S. Debt Deal is Struck

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Boeing ( BA ) 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 ( LMT ), Northrop Grummann ( NOC ) 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 for?

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 going forward.

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



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 , Investing Ideas , Stocks , US Markets

Referenced Stocks: BA , LMT , NOC

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