Why Is Poland Buying $12 Billion-Worth of Boeing Helicopters?

Ever since Russia invaded Ukraine last year, European countries have been beefing up their militaries as they worry about who might be next -- and no country seems more worried about Russia than Poland.

In February last year, just weeks after the invasion, Poland announced plans to spend $6 billion to buy 250 main battle tanks from General Dynamics (NYSE: GD). A year later, in March 2023, Poland placed an order for $10 billion worth of HIMARS rocket launchers from Lockheed Martin (LMT -0.75%).

But even that gigantic contract got dwarfed by the buy order Poland placed earlier this month. Poland, it seems, is now in the market for nearly 100 units of Boeing's (BA 0.25%) vaunted AH-64E Apache attack helicopter. 

96 Apaches for Poland

To be precise, on Aug. 21, the U.S. Defense Security Cooperation Agency (the foreign arms sales division of the Pentagon) notified Congress of a Polish request to purchase 96 Apache helicopters from Boeing -- along with 210 General Electric (GE 0.68%) T700-GE 701D engines to power them, and more than 2,800 Hellfire, JAGM, and Stinger missiles from Lockheed and RTX (RTX -0.29%) to launch from them.

In total, the cost of this helicopter fleet will set Poland back a cool $12 billion. The money will be split several ways among the several defense contractors contributing the various parts of the Apache weapons system. But with most of the cash going to Boeing and Lockheed, those two companies -- Boeing first of all -- were named the principal contractors on this arms deal.

Now what does it mean to investors?

What it means to Boeing

Details of Pentagon arms sales are notoriously difficult to parse. It's difficult to say precisely how much of the $12 billion allocated to this sale as a whole will go directly to Boeing, for example, how much is paid directly to Lockheed (Boeing's partner on the Longbow variant of the Apache), how much goes directly to the makers of the various rockets, radars, and other equipment that goes into the Apache -- or how much goes to Boeing, and then filters out to other defense contractors, who are parts suppliers to Boeing, as cost of goods sold, resulting in less gross profit for Boeing.

That being said, at an average cost of $125 million per aircraft, the current Apache sale seems to have been made at something of a discount to other past sales of the helicopter to U.S. allies. For example, in 2020, DSCA notified Congress of a $4 billion deal to sell and "remanufacture" a total of 24 AH-64E Apache helicopters for Kuwait, which works out to an average cost of about $167 million per aircraft. 

Logically, this does suggest that Boeing might be earning reduced gross profit margins even on this gigantic arms deal for Poland.

What it means to Boeing investors

In other words, if Poland is getting a good price on its new helicopters, that might not be great news for Boeing stock.

On the one hand, $12 billion in revenue -- even if some of that revenue is parceled out to suppliers providing the parts and equipment needed to complete the aircraft -- is a lot of money for Boeing, equivalent to more than six months' revenue at the company's Defense, Space & Security division. It's not necessarily, however, guaranteed to translate into big profits for Boeing, which reported a $3.5 billion loss in this division last year, according to data from S&P Global Market Intelligence.

While the added revenue may help to overcome Boeing's fixed costs and generate a profit, if Boeing is currently producing weapons systems at a loss, then more sales could simply mean more losses for Boeing.

Hope for Boeing?

There is, however, another way to look at this. Whatever Boeing's income statement tells you about the health of the business -- and admittedly, right now it's telling you nothing very good -- Boeing's cash flow statement does tell a different tale.

As the pandemic has faded, and travelers have returned to the air, Boeing's done a good job of ramping back up its commercial airlines business, with the result that cash is once again flowing back into Boeing -- $7.8 billion worth of positive free cash flow over the last 12 months alone. $12 billion worth of cash from Apache sales, even if coming in over a period of years, should help to swell that total on the defense side of Boeing's business, helping Boeing stock to hit Wall Street targets for more than $10 billion in positive free cash flow by 2025, and more than $12 billion by 2027.

Ultimately, at a current valuation of nearly 18 times free cash flow, even if Boeing hits these numbers, I'm still not convinced even this is a fast enough growth rate (about 12% per year) to justify the valuation on Boeing stock -- especially not with Boeing toting around nearly $40 billion in net debt, which has to be factored into the valuation.

While winning a $12 billion contract in Poland sounds like good news, it's still not good enough to make Boeing stock a buy.