The lead aviation giant Boeing (BA, Financial) makes sizable portion of its revenues from its commercial and defense segment. In fiscal 2013, the commercial segment’s revenue grew to 61% of the total revenue of $86.6 billion, while that of defense’s contribution in the top line reduced to 38%. In isolation, the defense wing’s revenue contribution to total sales might look quite healthy. But if we consider the fact that this division accounted for nearly half the total the Chicago-headquartered company’s in 2011, it would call for contemplation. So what’s going wrong? Is the situation really that crucial?
Shrinking Share of Defense
The defense segment has been hit by the restrain federal budget for discretionary spending. This had somewhat dimmed the defense outlook for the industry by and large. However, steady growth in commercial aviation, particularly with a strong demand outlook for 35,000 units should help the company moderate the effect of softer revenues from the defense arm.
The number of defense contracts may have reduced, but Boeing still remains one of the lead choices for any government or defense contracts, the other of course being its archrival Lockheed Martin (LMT, Financial). Investors need not worry much. The aero major got some relieving news.
Hands on a Contract
Boeing bagged a decent contract valued $1.16 billion from the Pentagon. The American company has been opted to prepare and deliver AH-64E Apache helicopters to the U.S. Army. According to the deal, the company would have to re-make 72 Apaches, in addition to delivering 10 new ones. Boeing’s also required to arrange the crew trainers, and giving logistic and ground support.
Another positive development observed in the last quarter was that the defense share in total revenue increased to $8,855, up 6% year over year, although its contribution on total revenue for the entire fiscal had dropped. Operating margins for the last quarter also observed a significant rise to 10.8%, up 180 basis points over a year ago margin.
Looking Ahead
The defense budget may have disturbed the mood of investors, but it’s being felt by the defense industry as a whole and not just Boeing alone. Despite the challenge, Boeing has maintained a positive defense outlook for the current year. It has set a revenue target in the range of $30-$31 billion and projects an operating margin of 9.5%.
As the global economy stabilizes with time, it would automatically solve the budget issues concerning discretionary spending. Boeing, Lockheed Martin and other defense firms have better hopes from 2014. They are trying to win overseas contract to offset the effect of the domestic market. This would help them keep their top line intact and reduce dependency on domestic market.
The Takeaway
Boeing’s defense segment might be looking a bit feeble at the moment, plagued by the budget pressure. But this will phase out with better days waiting ahead. Moreover the boom in the commercial aircraft segment is expected to alleviate the effect of the downtrend in the defense segment. Investors need not be apprehensive about the company performance. Boeing’s defense wing might be seeing dark clouds now, but the sky would clear soon.
