The Boeing Company (BA) has won a five-year contract from the U.S. Army for 177 CH-47 Chinook helicopters. The contract is potentially valued at $4 billion with an option for an additional 38 helicopters boosting the total order to 215 aircrafts.
This twin-engine, heavy-lift Chinooks helicopter is considered as the key component for combat, logistics and humanitarian operations not only for the U.S. Army but also for 18 other militaries around the globe. This multi-year deal is expected to save the government more than $810 million as against a year-to-year contract. Deliveries are slated to begin in 2015.
The U.S. Army currently has 241 F-model aircraft in its fleet and the new deal will eventually bring the CH-47F fleet total close to its goal of a solid 464 inventory. This figure also comprises an additional 24 Chinooks to replace "peacetime attrition" aircraft. Approximately 16 active-duty and National Guard units fly the chopper.
Besides the cost saves from the multi-year contract, the U.S. Army will reap the benefits of the production efficiency programs implemented at Boeing. The company has already spent $130 million to upgrade the Chinook manufacturing plant near Philadelphia in Ridley Park, Pa.
For fiscal year 2014, beginning Oct 1, the Army intends to spend over $5 billion on new aircraft. This budget includes Boeing’s 38 CH-47F Chinook and 65 UH-60M Black Hawk helicopters made by United Technologies Corp.’s (UTX) affiliate Sikorsky Aircraft Corp. It also includes 19 MQ-1 Gray Eagle drones manufactured by General Atomics Aeronautical Systems Inc.
Meanwhile, Boeing sees worldwide demand over the next 20 years to touch more than 35,000 new airplanes, valued at $4.8 trillion. This figure is higher than its earlier forecast of 34,000 new planes with a value of $4.5 trillion. The outlook mainly reflects rising demand from fast-growing emerging areas of the Asia-Pacific, mainly for single-aisle jets like its new 737 MAX. However, the company still remains uncertain about recovery in Europe and North America and does not rule out a downward revision.
The company expects passenger as well as cargo traffic to witness 5% growth annually. However, it foresees just 850 deliveries of cargo freighters, down from the previous assumption of 940 given a weak economy that has weighed on industrial shipments.
Boeing is one of the major players in the defense business and is among the best-positioned in its sector due to its balanced exposure to commercial aircraft and defense equipment. With the gradual recovery of the global economy, we believe freight and passenger traffic will improve going forward. Also, the U.S. defense budget is skewed towards a number of prominent Boeing programs.
Also, the U.S. DoD has a focus on Boeing’s programs like the F/A-18 fighter jet and its carrier based version EA-18G Growler, P-8A Chinook helicopter, Apache and Osprey rotorcraft, and the brigade combat team modernization program.
Boeing currently retains a Zacks Rank #3 (Hold). Other companies in the industry which are worth considering are Northrop Grumman Corp. (NOC) and Erickson Air-Crane Inc. (EAC). Northrop Grumman presently carries a Zacks Rank #2 (Buy) while Erickson Air-Crane has a Zacks Rank #1 (Strong Buy).
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