As predicted, 2011 is turning out to be a very good year for Boeing (NYSE: BA). 737 sales are taking off. The 747-8 made a successful first test flight. And of course, Boeing won the KC-X Tanker contract.
As I mentioned earlier this month, the company's already offering a commercial KC-X variant to FedEx (NYSE: FDX). That's probably a good idea, seeing as the company whittled its profit margins down to the bone to win the contract on the militarized version. But might Boeing have other tricks up its sleeve, to capitalize on the win even further?
Objection! That's a leading question!
Sustained. It is a leading question. Because Boeing could do just what I'm suggesting. Last week, DefenseNews.com reported that the U.S. Air Force is taking "draconian steps" to ensure Boeing sticks to the prices it bid on KC-X. Specifically, USAF is requiring that before any changes are introduced to the plane, such contract modifications must be approved at the "highest level."
Pundits applauded USAF's declaration of preemptive war on cost overruns, calling it "pretty prudent" -- "not great from a Boeing standpoint" but "the only way they're going to [get] the tanker at the cost that it was bid for." All of which, I admit, sounds bad for Boeing (and for subcontractors Spirit AeroSystems (NYSE: SPR), Rockwell Collins (NYSE: COL), United Technologies (NYSE: UTX), and Honeywell (NYSE: HON), which could find their own profit margins squeezed as Boeing tries to make a buck). But consider taking a contrarian position on this debate.
KC-X is a contract destined to last decades, not years. Over time, the initial $30 billion award that Boeing won is expected to morph into perhaps $100 billion in revenues, as more and more tankers get built. Ask yourself: How likely is it that Washington will maintain pricing discipline over that time period given its unimpressive track record?
Objection! More leading questions!
Granted. But the fact remains that congressmen and Pentagon purchasers have the attention spans of fruit flies, and are easily distracted by shiny objects and "next big thing" techno-widgets. Chances are, their pricing discipline might not outlast the news cycle of its announcement. If anything, the recent global turmoil in the Middle East and Japan prove that the U.S. certainly isn't immune from even more military assistance abroad. This should keep demand for military goods higher than most fiscal hawks care to envision.
My take: Fear not, Boeing investor. Pessimistic prognosticators and naysayers notwithstanding, Boeing will pluck a profit off this bird yet.
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