Boeing Will Increasingly Rely On International Defense Sales

by Trefis Team
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    Quick Take
  • U.S. defense spending is declining which is impacting sales at Boeing’s defense business
  • As a result, the company is increasing its focus on international defense sales
  • Boeing’s international defense sales are growing driven by rising defense spending from emerging countries like India, Korea and Brazil

Boeing‘s (NYSE:BA) sale of military aircraft and other defense related products to the U.S. government is coming under pressure from declining U.S. defense spending. Currently, the U.S. government plans to cut its defense spending by $487 billion over a 10-year period starting from government fiscal year 2012. This decline will impact Boeing severely as sales from the U.S. government constitute nearly 83% of its total defense sales. [1]

However, to counter the negative impact from declining U.S. defense spending, Boeing is increasingly focusing on growing its international defense sales. Defense spending from emerging countries like India, Korea and Brazil has been rising, and all of these countries have defense engagement agreements with the U.S. which will benefit Boeing.

The defense business constitutes around 40% of Boeing’s total value according to our estimates. We currently have a stock price estimate of $75 for Boeing, approximately in line with its current market price.

See our complete analysis of Boeing here

Declining U.S. defense sales

From 2009 to 2012, Boeing’s defense sales from the U.S. government contracted by 8%. [2] [1] The company anticipates this trend to continue for the foreseeable future and accordingly has forecast its defense sales to contract between 3% and 6% in 2013 on a year-over-year basis. [3]

However, the decline in Boeing’s U.S. defense sales is being partially offset by growth in international defense sales. From 2009 to 2012, Boeing’s sale of military hardware and services to international governments and alliances like NATO increased by 31%. [2] [1] This growth in international defense sales was driven by rising defense spending by major Asian countries like India, Japan and Korea and other emerging countries like Brazil.

Over the past decade, defense spending from India, Japan and Korea has increased at a rate higher than 3.5% per year. [4] Boeing has won several large contracts from these countries and is therefore focusing more on these regions. In mid 2012, Boeing finalized its order with India for 10 C-17 airlifters in a deal valued at over $2 billion. This order made India C-17′s largest international customer, surpassing the United Kingdom which has 8 C-17s in its air force.

Boeing is also in the process of delivering eight P8I maritime reconnaissance and anti-submarine warfare aircraft to the Indian Navy. The company also submitted its H-47 Chinook for the heavy-lift helicopter competition in India and proposed its AH-64 Apache for Indian Air Force’s next attack helicopters. Both these deals are estimated at over a billion dollars.

All in all, Boeing’s growing international defense sales driven by rising defense spending by emerging countries will help Boeing reduce the impact from declining U.S. defense spending. In the process, international defense sales will become increasingly important for the company.

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Notes:
  1. 2012 10-K, February 11 2013, www.boeing.com [] [] []
  2. 10-K for 2009, February 9 2010, www.boeing.com [] []
  3. Q4 2012 earning results, January 30 2013, www.boeing.com []
  4. Asian defense spending, October 2012, www.csis.org []
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