Great news! Wars in the Middle East are winding down. Unfortunately, they're shifting to other parts of Asia. Still, wars mean a need for military equipment, and for defense contractors that means profits -- usually, that's accompanied by a boost to stock value. However, for Boeing's (NYSE: BA ) C-17 U.S. military transport contract, the shift from the Middle East to other parts of Asia is not proving lucrative. Here's what you need to know.
The money is running dry
Defense spending is being slashed left and right, which means the Pentagon is making hard decisions when it comes to military needs. Currently, there are a number of programs that the Pentagon is unwilling to sacrifice, such as Lockheed Martin's (NYSE: LMT ) F-35 fighter, Huntington Ingalls Industries' (NYSE: HII ) CVN-78 aircraft carrier, and Northrop Grumman's (NYSE: NOC ) RQ-4 Global Hawk drones -- good news for these guys. Then, there are other programs that the Pentagon has deemed less critical. That includes Boeing's C-17 contract.
Richard Aboulafia, an aviation analyst with the Teal Group, said about the C-17, "The growth drivers are there, but the economic resources are not." Boeing's U.S. military C-17 contract is slated to end in 2014, and while the need for military transports is still there -- in fact. it's growing -- the money needed for the transports, is not. Consequently, a renewal for the C-17 contract doesn't look promising.
Oversees spending to the rescue?
With U.S. defense spending cuts looking to take a bite out of C-17 profits, oversees spending has become more important. Last week, Boeing delivered the first in an order of 10 C-17s, to India -- a contract worth a reported $1.78 billion. Additionally, Boeing's vice president of business development for mobility, surveillance, and engagement, Tommy Dunehew, stated that "five to six" new countries have shown interest in purchasing the C-17.
The India deal, and expressed interest from other countries, is great for Boeing. However, Boeing rival EADS' (NASDAQOTH: EADSY ) Airbus seems to be making progress with its troubled military transport plane, the A400. That could result in more competition for overseas sales.
So far, the A400 is four years behind schedule, and billions over budget because of a number of issues, but according to Airbus' Flight-test engineer, Eric Isorce, those issues have been solved. Boeing maintains that it doesn't see the A400 as a competitor, but considering that Airbus already has 170 orders to countries across Europe and plans to "aggressively" market the A400 to the Middle East, Asia, and Latin America, as soon as the A400 comes online, Boeing may want to take notice.
Set your sights on the horizon
Defense spending has to decrease; that's the reality of the sequestration. For Boeing, that may mean the end of its C-17 contract with the U.S. military. Still, there are lots of overseas opportunities that could prove lucrative to Boeing's bottom line. But as always, Boeing's chief rival, Airbus, is looking to be the recipient of those profits.
With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery" outlines three companies that could take off when the global economy gains steam. Click here to read the full report!