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Published: March 10, 2010
Know when to hold 'em, Kenny Rogers taught
us.
Know when to fold 'em.
Know when to walk away.
And know when to run.
Northrop Grumman CEO Wes Bush evidently knows the song. Mr. Bush
has decided to fold and walk away, if not run, from the U.S.
Department of Defense's multibillion-dollar contest to build the
Air Force's new tanker.
Northrup Grumman (NYSE: NOC), one of the top defense
contractors in the world and the third-largest in the United
States, announced Monday it was abandoning its bid for the new
plane, clearing the way for rival Boeing (NYSE: BA) to
win the $40 billion contract.
Boeing shares rose slightly on the news, though the stock is a
clear winner so far this year. Shares are up +25% in 2010,
utterly thumping of the Dow Jones Industrial Average's +1.4%
year-to-date gain and thoroughly trouncing the broader S&P 500
Index, which Boeing has outpaced by an eye-popping 22.8
percentage points.
The path to this point has not been one of the great stories of
American business. In fact, it's been a long-running and wholly
disastrous soap opera, a cheap melodrama that has kept the
military using refueling aircraft that were built during the
Eisenhower administration. (No joke: The first of the 803
KC-135s the Pentagon bought took off on Aug. 31, 1956. That's
five years before the current commander-in-chief was even born.)
The troubled tanker contract has encompassed more than just
harsh criticism from lawmakers like Sen. John McCain, who
objected to the terms of the initial deal, which was for the
Pentagon to lease the planes; it has at times degenerated into
outright scandal. A Boeing chief financial officer and a senior
Pentagon buyer involved in the deal actually went to jail over
illegal employment talks. Then, in 2008, Northrop won the deal.
Boeing complained and won a do-over. Finally, after years of
wrangling, Northrop bowed out.
Wall Street and Washington had been
prepared for the possibility of a single-vendor contract. The
question is not what this deal means for Boeing, the question is
what comes next for the aerospace giant.
One possible answer could be India.
India is shopping for a fleet of 126 fighters to defend it from
potential threats in Pakistan or China. The $11 billion deal has
drawn serious competition: Lockheed Martin's F-16, Dassault's
Rafale, the latest Russian MiG-35 and even Sweden's Saab.
Boeing's F/A-18 Super Hornet is also a contender, as is the
Eurofighter Typhoon, a joint project of Germany, Spain, Italy
and Great Britain. The Eurofighter is considered the frontrunner
to win the contract, according to India's ambassador to Italy,
though Russia is typically India's main arms supplier.
We'll know which company will have the contract soon enough:
Late last month, India said it was fast-tracking its procurement
efforts and that the testing phase, during which time the
country's military puts each company's plane through the paces,
should wrap up by the middle of the year.
A handful of emerging countries have made it a top order of
business to bolster their national defenses. India is a
particularly dramatic example given sometimes troubled northern
neighbors like Afghanistan and Pakistan, but the fact is the
world grows smaller and more dangerous every day. This threatens
the wealth and improved standards of living that dozens of small
countries have toiled for decades to achieve. As more countries
seek to protect themselves from aggression, business will
continue to boom for Boeing.
And it's not like business is bad here at home. A $40 billion
contract is a material chunk of business -- Boeing had $68.3
billion in revenue in 2009 -- but even that's a drop in the
bucket. President Obama's overall defense budget for fiscal
2011, which Congress has yet to finalize, calls for $708.3
billion in Pentagon appropriations. Or, to put bring the number
a little closer to home, Obama is calling for $7,083 per U.S.
household in defense spending.
Only governments can spend money like that.
And companies like Boeing -- the only competitor left standing
for the tanker and one of the finalists for the Indian fighter
contract -- will profit from increased defense spending, both
here and abroad, this year and next, to the benefit of
shareholders who understand how government actions can deliver
such strong returns.
-- Andy Obermueller
Chief Investment Strategist
Government-Driven Investing
P.S. I urged my paid subscribers to pick up shares of Boeing
back in September. We're up +32.2% so far and I think we've got
+56% upside from here before hitting my target. If you want to
leverage government action for your own portfolio, you owe it to
yourself to check out my premium service --
including this "government crisis stock" that could jump +257%
in the next year alone. |
