President-elect Donald Trump took to Twitter (TWTR, Financial) late Thursday, suggesting that Boeing (BA, Financial) has an opportunity to take over the lucrative joint strike fighter (JSF) contract from Lockheed Martin (LMT, Financial). This contract has been called the largest military contract in history and has been held by Lockheed Martin since 2001.
“Based on the tremendous cost and cost overruns of the Lockheed Martin F-35, I have asked Boeing to price out a comparable F/A-18 Super Hornet!” – President-elect Donald Trump on Twitter, Dec. 22
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Considering the size and scope of this military contract, this could be a potentially devastating blow to Lockheed Martin and a huge win for Boeing. In 2015, the contract to build and design the JSF F-35 accounted for roughly 25% of Lockheed Martin’s revenue. If moved to Boeing, it could add 10% to the companies top line.
Is this a day trade or a value investment opportunity?
For the time being, this firmly remains a day trade. Value investors beware.
It is far too early to be counting any future cash flow payments to Boeing as a result of this Tweet. Yes, it opens the door for dialogue. However, a stock is not truly undervalued until these cash flows are contracted, highly probable or realized. Even under Boeing’s highly unusual program accounting methodology, revenue from an F-35 replacement would be years – maybe decades – down the line.
Furthermore, this Tweet from Trump will do little to change decades of history at the Pentagon and within the military-industrial complex. Boeing and Lockheed Martin already went toe to toe over the JSF contract in the 1990s. In this battle of titans, Boeing lost.
Keep an eye on this story in the weeks and months to come. If the winds of change begin to blow regarding the JSF contract, Boeing could become a compelling value investment opportunity. I say this because the company is already well positioned from a balance sheet, earnings and dividend perspective.
On Dec. 12, Boeing surprised the market by announcing a 30% increase in their quarterly dividend. This was a 30% increase to an already strong dividend paying 2.77% on a TTM basis. This dividend is stronger than 78% of competitors within the Aerospace and Defense Industry. Priced at just 23.95 times earnings, Boeing is just below the Standard & Poor's 500 average of 25.98 times earnings. Earnings per share were a strong $6.58 in September.
Bottom line – today’s Tweet should not be a buy signal for value investors. This is not the type of business catalyst that should be bought considering the information we have today. For traders who are comfortable using the options market, this could be an opportunity to use call options to reserve the right to own Boeing at a later day and a higher price.
Watch this story closely in the weeks and months to come.
Disclosure: I hold no positions mentioned in this article.
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