On the face of things, Boeing's (BA 0.39%) announcement of a 35-plane, $3.5 billion deal to sell 737 "MAX" jetliners to Russia's Aviation Capital Services sounds like a win for all parties involved.
For Boeing, obviously, the deal brings upwards of $2 billion in incremental revenues (at standard industry price discounts). And with this being the first time ever that Boeing has landed a sale of the new, reengined 737 within the Commonwealth of Independent States, it opens the door to additional sales to major Russian airlines. (Aviation Capital is itself only an airplane leasing agency.)
Aviation Capital, for its part, gets access to Boeing's newest narrow-body, powered by General Electric's (GE 1.44%) fuel-efficient LEAP-1B engine. It gets to offer its customers the new plane, and tout the 737 MAX's reported 13% improvement in fuel efficiency "over today's most fuel efficient single-aisle airplanes" as a selling point. The biggest winner of all here, though, appears to be the company Russian Technologies (aka "Rostech"), which owns Aviation Capital and which was presumably the key player in making the decision to buy Boeing's planes.
The wizard behind the titanium curtain
How is that so? It's because in addition to owning Aviation Capital, Rostech is also the majority shareholder in Russian titanium producer VSMPO-AVISMA. Simultaneously with the 737 sale announcement, you see -- but not overtly tied to it -- Boeing and VSMPO put out a separate press release announcing plans to "expand collaboration in titanium procurement and technology development."
Boeing's been working with VSMPO for quite some time, of course. It sort of has to, seeing as "VSMPO-AVISMA is the world's largest titanium producer," and therefore "one of the largest titanium suppliers to Boeing." Together, the firms operate a joint venture in Russia and have reportedly developed at least "three new technologies." They're now planning to work together to find ways to "further reduce the cost of titanium parts in commercial airplane manufacturing," and, specifically, the cost of building the 737 MAX and the 787 Dreamliner (also on order in Russia).
This alliance may, however, pose some problems for local American titanium specialists such as RTI International (NYSE: RTI) and Titanium Metals (TIE.DL) -- each of which does substantial business with Boeing, and each of which counts VSMPO as a competitor. Meanwhile, one company at least stands to benefit from Boeing's deepening relations with VSMPO -- Allegheny Technologies (ATI -1.58%), America's third-largest titanium metals maker, and a company that conveniently inked an alliance of its own with VSMPO back in 2003.
Over the next 30 years, Boeing says it expects to spend $27 billion or more buying Russian titanium. That's $27 billion dollars it will not be spending on titanium parts from RTI and Timet. It's $27 billion in spending, though, that Allegheny will likely have a hand in.
Apropos of everything
So far, we've talked mainly about the business side of Boeing's "arrangement" with VSMPO. But what's all this mean to investors?
Growth-wise, Wall Street analysts currently have all three of Allegheny, RTI, and Timet marked down for 15% expected annual profits growth over the next five years. Yet right now, Allegheny is the only stock of the three that carries a P/E ratio (of 16.5) that looks attractive next to this growth rate. Both Timet, at 19 times earnings, and RTI, at 54 times, look significantly more expensive. (Not insignificantly, Allegheny is also the most generous dividend payer of the three, with a dividend yield of 2.7%.)
All of which adds up to one conclusion: The sale of 35 airplanes to Russia may be good news for Boeing investors. It may be even better news for shareholders of Allegheny Technologies.
