Several news outlets reported the impending announcement of the Defense Department's cancellation of the RAH-66 Comanche attack helicopter. Such a decision would take the potential of billions in sales off the table for Boeing (NYSE:BA) and United Technologies (NYSE:UTX), which were co-developers of the project.
As of early this afternoon, Boeing stock was down about 2% on the news, with United Technologies off 3%. United's Sikorsky division is believed to be impacted harder than Boeing, since the latter currently manufactures the Apache helicopter and as such would gain some of the sales lost due to the cancellation of the Comanche.
Last month, the Office of Management and Budget at the White House asked the Defense Department to do an analysis to determine whether the Comanche program -- as well as the F/A-22 Raptor fighter jet from Lockheed Martin (NYSE:LMT) -- was worth the money. Apparently, the answer on the Comanche is "no."
The program started in 1983 as the Army sought an effective armed "scout" helicopter. Production was to begin in 2006. Yes, that's right. The program started more than 20 years ago, and we're still several years away from production, and they cancel the project now. Already lawmakers in the Connecticut home of United Technologies are bemoaning the potential loss of jobs that termination would cause.
But at current estimates of $38 billion, this is a program that has seen massive hikes in price. Many military experts now believe that unmanned drones can perform most of the missions that Comanches would be asked to do, thus such a huge expenditure is not a good use of resources. Drones were deployed in the Iraq war in large numbers and were considered effective reconnaissance tools.
Both Boeing and Sikorsky are slated to receive termination fees estimated at $2 billion-$4 billion, if the Pentagon cancels the Comanche at this point in time. One of the more interesting elements of analyzing defense contractors is their lack of recourse should the Pentagon choose to cancel programs. The Pentagon generally has unlimited right to eliminate programs that it has contracted with outside manufacturers, under certain terms. So, while the dollar amounts can be enormous for defense contracts, it can be a mistake to assume that a contract signed equals revenues coming in the door. In this case, the actual take for the companies looks to be an order of magnitude lower than originally thought.
Bill Mann owns none of the companies mentioned in this article. United Technologies (up 75%) was one of Bill Mann's selections for The Motley Fool Select, predecessor of Motley Fool Hidden Gems newsletter.
