Since the the Iranian Revolution of 1979, U.S. companies have found themselves not welcome in Iran. Between the Iranian government's own rhetoric and myriad sanctions from the U.S. government, doing business in Iran has been a nightmare that most U.S. companies dare not even attempt. That era may be coming to an end.
Since reaching an interim nuclear deal with Iran in November, which went into effect on Jan. 20, the prospect of a full rapprochement with Iran has grown considerably. European businesses have sent delegations to Iran, at times drawing complaints from the Obama administration that they are jumping the gun. Despite this, U.S. companies are following their lead.
Flying the Iranian skies
Recently, it was revealed that both Boeing (NYSE:BA) and General Electric (NYSE:GE) have applied for export licenses to Iran. At the moment, those licenses are sought only for the shipment of parts for Iranian passenger jets.
Iran Air is a small and struggling airline by flag carrier standards. Its fleet is aging, mostly composed of old Boeing and Airbus (OTC:EADSY) jets from the 1970s and 1980s, back when business was a bit easier to do. Even getting the equipment to keep those planes in operating condition has been an enormous struggle for the airline.
General Electric has couched its export efforts as a matter of safety, saying that jet parts are necessary to keep civilian aircraft safe to fly. They are even promising to donate the profits from any near-term deals with Iran to charity, in an attempt to placate the inevitable critics of such a deal.
The ultimate growth market
It may sound like simple charity, but it's not. Iran the pariah state may not need to purchase much in the way of civilian aerospace equipment, but an Iran that has restored ties with the international community would.
Not only is there the business of replacing those elderly jets, but Iran Air and others would be shopping for the makings of a modern passenger airline fleet for an oil-rich nation of nearly 80 million people. That's a lot of business for whoever can land it.
How big? At the Dubai Airshow in November, Iranian executives in attendance were openly talking about a "spending spree" as soon as sanctions were lifted, and officials have suggested between 250 and 400 passenger jets could eventually be ordered.
Getting those jet parts into Iran would be a huge goodwill gesture for the companies, and even if the sales themselves are of little to no impact to the bottom line, they could easily push the companies to the front of the line if and when those big orders come through.
By the numbers
Boeing and Airbus stand to gain the most from this. Boeing is reasonably priced at current levels, given its impressive return on equity numbers and comfortable levels of cash on hand.
Airbus, by contrast, feels a little riskier, with sub-5% profit margins making it awfully expensive at these levels. An Iran contract, if it materializes, could justify these prices, but I don't give it nearly the upside Boeing could enjoy from a big modernization campaign in Iran.
Its enormous size and diversity makes a potential deal with Iran much less of a game changer for General Electric; currently its shares are quite reasonably priced at around 13-14 times forward year earnings. GE also pays the best dividend of the bunch and doesn't feel like a serious gamble even if the Iran deal doesn't materialize.