Boeing Defense Sales Surge

Summary

• Boeing Defense sales increased significantly.
• Sales increase is driven by Harpoon missiles sales to Saudi Arabia.
• Notion that US is pumping Boeing’s cash position by Defense contracts is not true.
• Looking for a helping hand in the market? Members of The Aerospace Forum get exclusive ideas and guidance to navigate any climate. Get started today »

In two recent reports, I had a look at Boeing's (NYSE:BA) Defense business. In one of the reports, we observed that Defense contract awards were driven by Harpoon missile sales and sales for and in support of the P-8 Poseidon. Noteworthy was that even though Boeing received billions in cash, of which a portion likely will also flow into the supply chain from these contracts, they are not offsetting delivery and order declines at Boeing Commercial Airplanes. In a separate piece, we also explained that recent Defense contracts and prominence in the overall earnings and revenue mix are not a sign of strength of Defense, but a sign of exceptional weakness for Boeing's Commercial Airplanes business.

Source: DefenceTalk

With Boeing Commercial Airplanes not performing well, Boeing Defense, Space & Security (BDS) is indeed becoming more prominent in the mix, and we are seeing a renewed focus on the Defense side of Boeing's business. However, in the presence of charges, it is actually Boeing Global Services which derives its revenues from Commercial Airplanes products and Boeing Defense, Space & Security products that is the strong performer.

With the earnings distribution shifting, readers have requested coverage of Boeing's Defense orders. Previously, we had a dedicated monthly coverage for Defense contracts, but because readership fell short of expectations while preparing the reports took hours, we cancelled that series. We have now repositioned and relaunched that series, which is based on a Defense contract monitor that we have built earlier this year. The Defense monitor is an interactive model that we made available for subscribers of The Aerospace Forum and allows the user to slice data in almost any way they want. We are currently working on expanding that model, but already have collected almost 450 defense contracts including their values.

In this report, I want to have a look at the order activity for the month of May.

Harpoon Missiles lead the way

Figure 1: Boeing Defense contracts May 2020 (Source: AeroAnalysis)

The most notable sales during the month were for the Harpoon missiles. Boeing sold 467 Harpoon missiles to Thailand, Brazil, Qatar and Saudi Arabia while it sold support equipment to Japan and The Netherlands. The contract is worth around $665 million and Boeing received all funds on contract award.

The bigger order came from Saudi Arabia which procured 650 AGM-84H/K SLAM-ER (Stand-Off Land Attack Missile-Expanded Response) missiles including obsolescence redesign efforts. The AGM-84H/K SLAM-ER is an advanced stand-off precision-guided, air-launched cruise missile used by the US, Turkey, South Korea, Saudi Arabia and United Arab Emirates.

The Harpoon missile platform accounted for 90% of the order inflow during the month. Significantly smaller contracts during the month were $130 million contract for the Ground-Based Midcourse Defense, which is the US anti-ballistic missile program to intercept warheads in space and a $63.9 million contract for the P-8A Poseidon. The GMD contract provides for the manufacturing of C2 boost vehicles, booster spare parts and associated avionics to maintain fleet and flight test programs while the P-8A contract provides for integrated logistics support, increased capabilities and support production of Lot 10 P-8A aircraft.

We compared how contract awards developed year-over-year and observed that Defense contracts awards grew by $2.3B year-over-year. The Boeing bear will say that the US is providing Boeing with cash by awarding them Defense contracts. Reality, however, is different. In the same month last year, the US accounted for 85% of the contract awards by value. In May 2020, Saudi Arabia accounted for two thirds of the Boeing Defense contracts and the Harpoon missile sales to Saudi Arabia accounted for $2B out of the $2.3B year-over-year increase. So, the notion that Boeing is being kept afloat by US Defense money is not true.

Conclusion

During the month of May, Boeing received almost $3B in Defense and Services contracts, of which 98% was awarded. We don't quite know how much of those obligated funds Boeing keeps and how much is distributed among suppliers, but for Boeing having these funds come in is important given the state of the commercial aircraft industry. Contrary to what many believe, the order inflow wasn't carried by the United States to infuse Boeing with cash, but by Saudi Arabia for the procurement of Harpoon missiles, which led to a surge in Defense sales. Important to realize is that just like with the commercial aircraft business, defense and associated services have contract time frames spanning multiple years and generally revenues will also be recognized over that time frame. So, the contract awards we are seeing now do not translate directly into revenues nor do they actually offset the declines at Boeing Commercial Airplanes contrary to what many believe.

Analyst’s Disclosure: I am/we are long BA, EADSF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[vortex generator]

Today the USAF announced they will wait until 2024 to determine the readiness of the Tanker....

Yes, the USAF is propping Boeing up, they should have stopped taking deliveries of the tanker long ago..
THE USAF also gave thenm the money they were withholding on the tanker due to the defects...(even though it is not planned to have it fixed by 2022...

[Hudson Investments]

Defense is a good backstop

[Mack Attack]

Boeing is probably going to head back to $330/share or so

I just don’t like how much debt they saddled and how powerful their union got

[KevinT9]

Boeing was awarded 14,614 defense contracts last year worth over $27.3 billion -
www.governmentcontractswon.com/...

www.governmentcontractswon.com/...

[rockjcp]

Dose of reality early this morning. Looking toward FAA chief testimony to Congress next week and any information from BA on MAX progress toward approval. Defense is like Atlas holding BA up.

[Australian investor]

So what is your recommendation? Buy/sell/hold? Do you think recent upswing in price will sustain?

[sts66]

What the heck does SA need 467 cruise missiles for? Are they planning on carpet bombing Yemen?

[MillionsDollarMan]

They don’t need them yet.

[SageInvestor]

Iran

[firsTraveler]

Another way to do a bailout.

[kevinconnolly]

The usual smart article from the man who knows the ins and outs!!

[GreenPirate]

Dhierin Bechai, Have you seen this PBS Special? Note that in July there was strong opposition to the deal in the House from Democrats and Republicans: "There is no emergency to the United States or to UAE or to Saudi Arabia regarding the war in Yemen,” Rep. Ted Lieu, D-Calif., who introduced the measure to stop the deal, said on the House floor before the 246-180 vote. “It is a horrific humanitarian problem".

"What You Need to Know About Trump’s $8 Billion Saudi Arms Deal

“The House raised the stakes in its standoff with the White House last week when it voted to block a major arms sale and end American involvement in the war in Yemen. These are only the latest moves in a months-long effort to rein in presidential war-making powers and reshape defense policy.

In May, the Trump administration issued an emergency declaration to push through an $8.1 billion arms deal to Saudi Arabia, the United Arab Emirates and Jordan without congressional approval. Proponents of the deal contend that a fresh supply of weapons is necessary to counter mounting Iranian aggression that threatens to destabilize the region and put U.S. security interests at risk. However, the declaration provoked anger from both Democratic and Republican lawmakers, who have criticized civilian deaths caused by Saudi-led air strikes in Yemen."
www.pbs.org/...

There was of course the tragedy in Yemen in 2018 and memories are long. A school bus full of children was destroyed and the bomb used had a US serial number. The global humanitarian community was outraged and the loss has weighed heavily on America's reputation. Representatives in the US House who are opposed the arms deal remain in the majority. They do not want to see this event repeated, but Trump's deal in 2018 and ongoing sales of weapons to Saudi Arabia are virtual assurances to the world that it will happen.
www.cnn.com/...

[cjsmit77]

In that area of the world there are no good answers and likely never will be. Plus Congress just engages in endless political posturing so they are impossibly difficult to take seriously.

[PhiloB]

CNN and PBS?

Iran is building nuclear weapons among other weapons which is being ignored by democrats. Saudi is not going to become subservient to Iran.

Keep selling the weapons Boeing.

[Swissguy]

Weapon trade is the new slave trade.

[Fred Banks]

It's hard to evaluate the defense side as they don't publicize much of their R&D, new prototypes and even possible contracts. I listened to the president of BDS talking about possible sales of F-15's to the USAF which has happened.

Also, when we have a new president, the JSF has an excellent chance of being cancelled. Boeing already has developed UCAVS to replace them at a lower cost. They have orders for JDAMS which are about 1/4 price of laser guided missiles.

I'd also like to point out the philosophy of BDS, which is protect the pilot. All of my managers have this philosophy, and have lost contracts due to this reason. One of the failing of the JSF.

[sts66]

The JSF/F-35 will not be canceled - it's being produced and purchased by a global consortium - F-18's are being replaced by them.

[Adambombfx]

Good job with this article, if I can ask in the future when your next article comes out if you could go into some detail with BA's deal with SPR Spirit Aerosystems. I own both for years and there are many investors out there that cant afford to get in BA but would be able to benefit by buying SPR. I loaded up on BA at $96ish and SPR at 15ish just to add to the backend of my BA holdings.

[Dhierin Bechai]

SPR is on my list to be added to the coverage.

[Adambombfx]

You're a good man !, Thank you .....

[Geo XXX]

I second that!

[Fijimon 1]

Funny considering Saudi Arabia also invested in Boeing a few weeks ago

[Dhierin Bechai]

Boeing and Saudi Arabia collaborate a lot... after all Saudi Arabia has interest in having access to advanced weapon systems.

[pequity]

That’s why we should never break up BA

[Dhierin Bechai]

For those interested: The Defense contracts monitor (an interactive dashboard) is accessible to subscribers of The Aerospace Forum. If you want to receive a custom discount offer, feel free to send me a DM and I wll send you an invitation to join at a discounted rate.

[rockjcp]

Good points DB. Defense continues strong and will continue to grow. BA is huge but the progress of the MAX is essential to justify a share price @ 220. Earnings for Q1 will not be pretty but good to see passengers desiring to fly!

[brainhub]

Well, defense business provides important cash flow to BA, not affected by economy or Covid-19. US government recently decided to accelerate the payments for defense orders, so this is positive corelarion with Covid-19 (meaning that defense business benefited from Covid-19 in at least one instance). NASA spacee program is another valuable category. BA is my largest position.

[GreenPirate]

Boeing is our smallest investment. We are not inclined to invest in it over defense or weapons contracts, especially as Trump is personally seeing to it that Saudi Arabia gets major weapons supplies. I don't think this promotes US interests, and it is short sighted as an economic solution for the USA.

Here's a Trevis breakdown for Jan. 2020 on, "How Much Of Boeing’s Revenues Comes From The U.S. Government?"

"Boeing’s 4 divisions are expected to make $92.3 Billion for the full year of 2019."
Commercial Airplanes: $45.6 Billion (49%)
Defense, Space & Security Systems: $27.4 Billion (30%)
Global Services: $19.0 Billion (21%)
Boeing Capital Corporation: $ 0.3 Billion (<1%)

In terms of Customer, Boeing’s Expected Revenues of $92.3 Billion in 2019 can be divided into 2 categories: In terms of Customer, Boeing’s Expected Revenues of $92.3 Bil in 2019 can be divided into 2 categories:

US government – $28.6 Bil (31%)
Others – $63.7 Bil (69%)
US government – $28.6 Bil (31%)
Others – $63.7 Bil (69%)

www.forbes.com/...
"Is It Safe To Travel Again? Your Coronavirus Questions Answered
A Q&A for anyone confused about traveling right now. The latest news on travel restrictions at home and abroad, how to stay healthy and what you need to know about booking vacation rentals" www.wsj.com/...

The USA is facing an economic dilemma. Trump seems to believe that we can continue to print money and offset the losses from the pandemic. But until US manufacturing picks up, until people start actually FLYING again, there are vulnerabilities.

And how long can Trump prop it all up with weapons sales? How much do the Saudis actually want to buy? Its not a positive long term solution.