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Will Trump's Tweet Hurt Boeing's (BA) Air Force One Deal?
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Shares of The Boeing Company (BA - Free Report) lost a mere 0.1% in the pre-market trading session on Dec 6, after President-elect Donald Trump slammed the aerospace giant on Twitter for developing an expensive version of Air Force One. However, at the end of the day, the stock bounced back and remained steady at $152.24.
Trump’s Tweet
In a Twitter post, America’s commander-in-chief urged the federal government to cancel an order to Boeing, involving the remodeling of 2 Air Force One aircraft as the costs associated with the project are deemed “out of control”.
In particular, Trump claims a figure of over $4 billion to be the exact cost of this Air Force One replacement program.
Consequent to the post, Trump stressed on his message later at the Trump Tower lobby by saying that Boeing is imposing “ridiculously” high price for the production of new 747 planes on the U.S. government although he is not against the company’s profit-maximizing strategy.
White House’s Response
The White House has raised questions over the facts stated in Trump’s tweet. In particular, the White House press secretary believes that the quoted expense figure does not fairly reflect the financial terms of the deal inked between Boeing and the Department of Defense (DoD) earlier this year.
Boeing’s Reaction
In retaliation to Trump’s tweet, Boeing came forward with a statement that the company’s current deal with DoD, involving evaluation of the capabilities of the two new jets, is valued at $170 million. Going forward, the company plans to continue to work on the subsequent phases of the replacement program with the U.S. Air Force, the cost for which has been kept under wraps.
This clearly indicates that the replacement project is at a nascent stage and the final deal is yet to be signed.
The Visible Facts
With the current Air Force One fleet, served by Boeing’s heavy model 747-200 aircraft, slated to reach the end of the planned 30-year life in 2017, the White House has been urging the DoD for a replacement. In Jan 2016, Boeing secured a contract worth $25.8 million to start research work on replacing the current Air Force models with the more fuel-efficient 747-8 model – the only four-engine commercial jet Boeing makes, providing an extra margin of flight safety over the more standard twin-engine planes.
The engineering and manufacturing phase is expected to start in 2017. Although the Air Force did not offer any specific expectation for the cost and time of these replacements, the latest estimate has been $2.7 billion for the initial stage of the project involving research, development, testing and evaluation. According to Associated Press, the new jets will begin service from 2024.
Therefore it is not clear as to what led Trump to make such a statement. When questioned, Trump couldn’t substantiate the figures with proper facts. However, a Mar 2016 report from the Government Accountability Office, a watchdog agency, estimated the total cost of the two 747's at $3.2 billion. This might possibly be the reason for Trump’s tweet.
Our View
We believe this tweet has not been very damaging for Boeing as its share price remained a promising indicator. Also, although this might be viewed as a cost-cutting initiative by the next commander-in-chief, the implementation of the same will call for approval from other parts of the administration as well.
The Air Force One has been protecting the U.S. president since 1910 with its specialized military enhancements. With increasing security threats and the fact that the current Air Force One planes will soon become outdated, the U.S. administration will most probably never scrap the deal for upgrading the lot, for the president’s sake. Therefore, the deal is likely to remain with Boeing, the only aircraft major that serves the President directly, amidst a peer group that includes Lockheed Martin Corp. (LMT - Free Report) , Northrop Grumman Corporation (NOC - Free Report) and a few others.
However, over the past one year, the company gained 71.36%, below the Zacks categorized Aerospace-Defense industry’s 82.85%. This could have been triggered by the budget volatility, uncertainties related to high-cost programs, risks associated with key project executions and order cancellations.
Last quarter, Engility’s earnings surpassed the Zacks Consensus Estimate by 36.84%. The company’s EPS growth for next year is pegged at 31.70%.
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Will Trump's Tweet Hurt Boeing's (BA) Air Force One Deal?
Shares of The Boeing Company (BA - Free Report) lost a mere 0.1% in the pre-market trading session on Dec 6, after President-elect Donald Trump slammed the aerospace giant on Twitter for developing an expensive version of Air Force One. However, at the end of the day, the stock bounced back and remained steady at $152.24.
Trump’s Tweet
In a Twitter post, America’s commander-in-chief urged the federal government to cancel an order to Boeing, involving the remodeling of 2 Air Force One aircraft as the costs associated with the project are deemed “out of control”.
In particular, Trump claims a figure of over $4 billion to be the exact cost of this Air Force One replacement program.
Consequent to the post, Trump stressed on his message later at the Trump Tower lobby by saying that Boeing is imposing “ridiculously” high price for the production of new 747 planes on the U.S. government although he is not against the company’s profit-maximizing strategy.
White House’s Response
The White House has raised questions over the facts stated in Trump’s tweet. In particular, the White House press secretary believes that the quoted expense figure does not fairly reflect the financial terms of the deal inked between Boeing and the Department of Defense (DoD) earlier this year.
Boeing’s Reaction
In retaliation to Trump’s tweet, Boeing came forward with a statement that the company’s current deal with DoD, involving evaluation of the capabilities of the two new jets, is valued at $170 million. Going forward, the company plans to continue to work on the subsequent phases of the replacement program with the U.S. Air Force, the cost for which has been kept under wraps.
This clearly indicates that the replacement project is at a nascent stage and the final deal is yet to be signed.
The Visible Facts
With the current Air Force One fleet, served by Boeing’s heavy model 747-200 aircraft, slated to reach the end of the planned 30-year life in 2017, the White House has been urging the DoD for a replacement. In Jan 2016, Boeing secured a contract worth $25.8 million to start research work on replacing the current Air Force models with the more fuel-efficient 747-8 model – the only four-engine commercial jet Boeing makes, providing an extra margin of flight safety over the more standard twin-engine planes.
The engineering and manufacturing phase is expected to start in 2017. Although the Air Force did not offer any specific expectation for the cost and time of these replacements, the latest estimate has been $2.7 billion for the initial stage of the project involving research, development, testing and evaluation. According to Associated Press, the new jets will begin service from 2024.
Therefore it is not clear as to what led Trump to make such a statement. When questioned, Trump couldn’t substantiate the figures with proper facts. However, a Mar 2016 report from the Government Accountability Office, a watchdog agency, estimated the total cost of the two 747's at $3.2 billion. This might possibly be the reason for Trump’s tweet.
Our View
We believe this tweet has not been very damaging for Boeing as its share price remained a promising indicator. Also, although this might be viewed as a cost-cutting initiative by the next commander-in-chief, the implementation of the same will call for approval from other parts of the administration as well.
The Air Force One has been protecting the U.S. president since 1910 with its specialized military enhancements. With increasing security threats and the fact that the current Air Force One planes will soon become outdated, the U.S. administration will most probably never scrap the deal for upgrading the lot, for the president’s sake. Therefore, the deal is likely to remain with Boeing, the only aircraft major that serves the President directly, amidst a peer group that includes Lockheed Martin Corp. (LMT - Free Report) , Northrop Grumman Corporation (NOC - Free Report) and a few others.
However, over the past one year, the company gained 71.36%, below the Zacks categorized Aerospace-Defense industry’s 82.85%. This could have been triggered by the budget volatility, uncertainties related to high-cost programs, risks associated with key project executions and order cancellations.
Zacks Rank & Key Pick
Boeing carries a Zacks Rank #3 (Hold). A better-ranked stock in the same space is Engility Holdings, Inc. , with a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Last quarter, Engility’s earnings surpassed the Zacks Consensus Estimate by 36.84%. The company’s EPS growth for next year is pegged at 31.70%.
Confidential from Zacks
Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand.Click to see them now>>