Boeing May Get a Second Shot at Large Tanker Contract

On March 27^th I wrote that although Boeing (BA) had lost its bid to provide the Air Force with a fleet of in-flight refueling tankers, the company still has a lot of upside. Well, Boeing protested the $35 billion contract that was awarded to Northrop Grumman Corp. (NOC) and EADS, so both sides sent lobbyists to Washington to have their say.

The Government Accountability Office came down on the side of Boeing; its decision reflected what it saw as a botched bidding process that was not fair and needed to be revisited. While the ruling is not binding, the Air Force is likely to reexamine the bidding process. 

Starting from scratch is not a realistic possibility as the controversy has become increasingly entangled in politics, but taken at face value it has at least put Boeing back in the game for this large contract. The contract’s size is quoted at $35-$40 billion, but the average USAF tanker is now 47 years old and there is speculation that the contract could in fact grow to be much larger than first estimates.  Christopher Hinton of MarketWatch estimated that the contract could mean over $1 trillion of revenue for the winning company over the next 50 years.

While there is no guarantee that Boeing is going to win the contract in the second round of bidding, the stock price got an almost 3% boost yesterday on the possibility. The USAF is expected to announce a reopening of the bidding because of the high profile nature of the conflict.  The original decision was a surprise for Boeing as they had a stranglehold on previous USAF tanker contracts.  Clearly, there is a lot riding on the contract, but the USAF is under pressure to get the deal done quickly to because it needs to replace the aging fleet of tankers in use right now.

We will continue to monitor the situation closely as the USAF decision will have impact on both sides’ stocks, and the effect will only be amplified by the buzz that this controversy has generated. As with the March 27^th piece, we still think that Boeing stock is undervalued. If Boeing wins this contract it would be a further improvement to fundamentals, but for right now at current levels we have a long term price target $87-$92.

Comments

[Pilot_151:]

Boeing didn't have a stranglehold, it was simply the best product at that time. If anyone has a stranglehold, it is John McCain. He has been trying to force the business away from Boeing and is now losing his battle. I was very disappointed with his comments that the losers were the taxpayers. We are the winners as we try to keep the 35 billion in our own country.

At the end of the day, as a Boeing share holder, I agree with your assessment that Boeing is undervalued and I would set the price at $100.

2008 Jun 20 09:41 AM

[timco42:]

Boeing is the last remaining manufacturer in the US of large multi-engine jet aircraft, airliner-based platforms, suitable for evolution into tanker format. McDonnell Douglas, Convair, Lockheed, all either failed in their airliner product lines or were amalgamated into Boeing itself. It makes absolutely no sense whatsoever to behave as McCain has done, in pretending that there is a viable US manufacturer other than Boeing for tankers in 2008. And stop the ridiculous nonsense about Airbus tankers being "assembled" in Alabama. They would be in such a state of near-completion (by European workers) that they will be flown to the US for interior fitment, as Dassault has done for years with its line of Falcon bizjets.

2008 Jun 21 02:55 AM

[Stefan from...:]

I would prefer the US Air Force contract being given to Boeing instead of Airbus/Northrop-Grumma...
I'm very unhappy to see the largest European defence company getting involved with the despicable US war machine.
In my eyes, European defence companies should primarily produce
for the European defence needs, and not for foreign superpowers.
This will prevent Europe and Airbus from getting blackmailable
in case of every larger disagreement between Europe and USA.

2008 Jun 24 07:24 AM