Boeing's Difficulties: Did a $272 Million Cost Overrun, or Something Worse, Push Its Share Price Down?


KC-46 with a B-2 Spirit. Photo credit: Boeing photo illustration.  

Boeing (NYSE: BA  ) reported its second-quarter 2014 earnings on Wednesday, July 23, and there's a lot to like. GAAP earnings from operations increased 4%, commercial airplane deliveries increased 7%, and Boeing's commercial airplane backlog came in at a record $377 billion, while Boeing's overall backlog remained incredibly impressive at $440 billion. So, with all this good news, why is Boeing's stock sinking? 

Cost overruns
In its second-quarter report, Boeing states, "Second-quarter 2014 results included a $272 million after-tax charge ($0.37 per share) on the KC-46A Tanker program reflecting the cost of additional engineering and systems installation work required to complete the Engineering and Manufacturing Development contract." 

KC-46 with F-15E Strike Eagles. Photo credit: Boeing photo illustration.

Considering that the KC tanker is one of the Pentagon's largest, and most watched weapons initiatives, it's understandable that investors could react negatively to what can only be described as another cost overrun at an early stage in this program. However, it seems unlikely that this is solely responsible for depressing Boeing's stock. Here's why.

As Boeing chairman and CEO Jim McNerney pointed out to Forbes, "While challenges resolving engineering and systems installation issues on our tanker test aircraft are resulting in higher spending to maintain schedule, the issues are well understood and we remain on path to begin flight testing fully provisioned tankers the first part of next year." 

Furthermore, even though Boeing had an after-tax charge of $272 million on the KC tanker, the contract itself is worth an estimated $52 billion just for development and procurement. When you factor in future parts and maintenance, analysts estimate that the contract worth could climb to $100 billion. As such, while cost overruns could eat into Boeing's KC tanker profit margins, overall, Boeing will likely make a fair amount of profit on this contract. Consequently, it seems unlikely that this cost overrun is the only thing negatively impacting Boeing's stock. 

The more ominous problem
As I wrote in June, the Export-Import Bank, or Ex-Im, is up for reauthorization in September of this year. However, there has been growing resistance to the reauthorization, largely spearheaded by lawmakers who see Ex-Im as nothing more than an example of crony capitalism, and something that's put taxpayers on the hook for $134 billion.    

Boeing 737-900ER. Photo credit: Boeing.

Considering that Ex-Im's mission states, "We assume credit and country risks that the private sector is unable or unwilling to accept," and a number of businesses, like Delta Airlines, have claimed that Ex-Im's financing negatively impacts their ability to compete against foreign airlines in the global marketplace, these concerns may have merit. 

Unfortunately for Boeing, the growing opposition to Ex-Im's reauthorization is unwelcome news because Boeing is one of Ex-Im's main beneficiaries. In fact, 40% of Ex-Im's resources are used to back loans to foreign buyers of Boeing's jets, and for Boeing's 2014 sales, Ex-Im's financing will support $10 billion for foreign airline sales. In addition, 24/7 Wall St. reported that 15% of Boeing's 2013 revenues flowed through Ex-Im, and without this favorable financing, Boeing would almost certainly be placed at a disadvantage to competitors like Airbus

Why this is important
When it comes to Boeing's business, the commercial airline segment is without a doubt the most lucrative and important -- again, of its $440 billion backlog, $377 billion is due to commercial airline orders, while total defense, space, and security accounts for approximately $50 billion.  Moreover, foreign airline sales are an important part of this business segment, and a number of these deals are financed through Ex-Im. Because of this, while it's probable that Boeing's KC tanker cost is negatively impacting Boeing's stock, it's likely that fear regarding Ex-Im's renewal is playing an even bigger role -- and it should, this is a very real risk to Boeing's profits.

Consequently, while the KC tanker cost is unwelcome news, it's not likely to make a large impact in Boeing's overall profits. A failure to reauthorize Ex-Im, on the other hand, is an entirely different story, and could prove quite costly to Boeing's bottom line. As such, while there's no way to know for certain what Congress will do when it comes to Ex-Im, this is something investors should keep close tabs on.

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