Aerospace giant Boeing (NYSE:BA) got both good news and bad news on Tuesday. The good news was that members of the House of Representatives resorted to a rarely used procedure to reauthorize the controversial Export-Import Bank over the objections of many Republican leaders. Boeing is the biggest beneficiary of Ex-Im Bank financing opportunities.
The bad news was that Boeing's defense business took another blow as it lost a joint bid with Lockheed Martin for the Pentagon's Long Range Strike Bomber contract. The deal, which could bring in about $80 billion of revenue over time, instead went to Northrop Grumman.
Investors are still trying to sort out the net effect of these two developments. However, I think the potential upside from getting the Ex-Im Bank back up and running outweighs the loss of the bomber contract.
Boeing's defense business is struggling
Boeing has been one of the main victims of weak U.S. defense spending. Even as its commercial aircraft division bounced back quickly in the years after the Great Recession, Boeing's defense segment produced less revenue in 2014 than in 2010. The segment's revenue is on pace to decline again in 2015.
With Boeing having lost out on the bomber contract, it's clear that the lean times will continue for its defense unit. Boeing recently ended production of the C-17 military cargo plane. It is relying on international sales to keep production of the F/A-18 and F-15 fighters going for now. That won't last forever, though, and Boeing will probably wrap up production of both planes by the end of the decade.
Boeing still has the KC-46 Pegasus aerial refueling plane in the early phases of production. But that program has been a bit of a fiasco, and Boeing has taken two special charges after development costs exceeded the contract cap.
There are some smaller military aircraft contracts coming in the next few years, as well, but Boeing will face plenty of competition for them. Given this environment, Boeing's defense revenue is likely to continue sliding for the foreseeable future.
But Boeing's commercial aviation business is growing
The good news, though, is that Boeing's commercial airplanes business is growing steadily. Revenue for that segment grew from less than $32 billion in 2010 to $60 billion last year. Revenue is expected to reach $65 billion to $66 billion in 2015.
Boeing plans to increase production of its stalwart 737 jet by 10 per month by 2018 and increase production of the 787 jet by four per month by 2019. These production increases will add more than $10 billion annually to Boeing's top line even after customary discounts. Higher selling prices for updated versions of the 737 and 777 jets (arriving in 2017 and 2020, respectively) will contribute additional revenue growth.
If the commercial-airplanes business stays on this growth trajectory, Boeing will be able to post significant revenue and earnings growth in the next five to 10 years despite a decline in military aircraft sales.
That's where the Export-Import Bank comes into play. About 15% of Boeing's aircraft sales (mainly those to airlines in emerging markets) benefit from Ex-Im Bank financing or loan guarantees. (The Ex-Im Bank is a U.S. government agency charged with supporting exports by providing financing when private funding is not available.)
Boeing's top competitor, Airbus, also has access to export credit financing. As a result, the longer the Ex-Im Bank remains closed, the more aircraft sales Boeing would lose to Airbus. Getting the bank reauthorized was thus crucial for keeping Boeing's most important business segment on track. By contrast, the Long Range Strike Bomber would have been nice to have but wasn't a potential game-changer.
Neither news item is set in stone
It's worth noting that neither the Long Range Strike Bomber award nor the Ex-Im Bank reauthorization is 100% set in stone. First, it has become routine for the losing bidders in military contracts to appeal, though the appeals rarely succeed.
Meanwhile, the Senate still needs to vote on the Ex-Im Bank bill passed by the House. While the main opposition to the bank has come from the House, it's not clear when the Senate will get to vote on the legislation.
Nevertheless, the most likely scenario is that Northrop Grumman will keep the bomber contract and the Ex-Im Bank will reopen within the next few months. If that happens, it will be a net positive for Boeing. It's more important for the company to keep its commercial aircraft business on a steady growth path than for it to prop up its shrinking defense segment.