After a lengthy design and bidding competition with the North American arm of the EADS (European Aeronautic Defense & Space Company), the United States Air Force has selected Boeing (BA – Free Boeing Stock Report) to build the next generation of aerial refueling tanker aircraft. These new planes will replace the Air Force's KC-135s, which, on average, have been in service for about 50 years. The last Boeing-built KC-135 was delivered in 1965 and at this time, the Air Force dedicates a great amount of resources to keep these "relics'' in the air.
The initial contract calls for Chicago-based Boeing to design and manufacture 179 tankers, which are based on its 767 platform. First deliveries are scheduled by 2017, when Boeing is to provide 18 planes. The entire deal is valued at approximately $35 billion. If all goes well, we believe that additional contracts will be signed, since the Air Force ought to be eager to eventually replace all 400 of its ancient KC-135s. Having said that, we think it's quite likely defense spending will come under fire in the years ahead, since budgetary constraints may become a factor.
In addition to the tanker contract, demand for Boeing's other aircraft, particularly its 787 Dreamliner, remain strong. Although the company has experienced several problems with the state-of-the-art aircraft, its order backlog for this plane totals about 850. This should support full production for many years and first deliveries are scheduled for the third quarter of 2011.
Upon the tanker news, Boeing stock was up more than 3% in early morning trading and is now closing in on its 52-week high of $76. Boeing shares have been on a good run of late, increasing 20% over the past year. Looking ahead, we project that Boeing will achieve healthy annual share-net gains to 2014-2016, thanks largely to its sizable backlog. Along with the tanker and 787 programs, Boeing plans to step up production of its popular 737 and 777 planes. Thus, buy-and-hold accounts may be interested in taking a position in this Dow-30 component.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.