Boeing may abandon plans to sell its aerial refueling tanker internationally if it loses its protest of a U.S. Air Force decision to buy $40 billion worth of tankers from a competitor, The Wall Street Journalreported Wednesday [subscription].
Boeing's Mark McGraw, the executive in charge of the program, told The Journal that Boeing had counted on the Pentagon to provide enough volume to make an international tanker business viable.
In February, Northrop Grumman (NYSE: NOC) and partner European Aeronautic, Defence & Space (EADS), parent of Airbus, beat out Boeing, the Air Force's only supplier of the aircraft for half a century; the Air Force recently announced that it continues to support that decision. Boeing protested the award to the Government Accountability Office, which must make its recommendation to the Pentagon by Thursday.
Boeing's (NYSE: BA) shares were virtually unchanged on the news in Wednesday mid-day trading, gaining eight cents to $74.43. Northrop Grumman rose $1.03 to $72.09 and EADS fell 46 euro cents to 13.57 euros on the Paris Exchange.
Bloomberg News reports that Boeing Co. (NYSE: BA) has a whole lot of losing going on. Yesterday, Boeing suffered its fourth straight defeat in three months on a U.S. defense contract. This loss represents $41 billion in lost revenue.
Here are the four contracts:
Yesterday.Lockheed Martin (NYSE: LMT) the world's largest defense company, beat Boeing for a $1.46 billion U.S. Air Force award to build a new network of navigation satellites for military and civilian use. The Air Force said it reviewed five years of past performance for both contractors. Boeing has yet to launch a single satellite under its most recent GPS contract from April 1996, and in 2006 the company forfeited $21.4 million and replaced the program's managers after delays and cost overruns.
February 2008. EADS, parent of Airbus and Northrop Grumman (NYSE: NOC) won a $35 billion tanker contest for the Air Force. I've spilled much electronic ink on this one -- it looks like the Air Force changed the specifications for the project but only told EADS about the change.
The Wall Street Journal reported that, in an attempt to toughen its regulation standards, SEC chairman Christopher Cox said earlier this week the agency would push Wall Street investment houses will have to reduce borrowing and rely less on short-term financing.
As part of plans to reduce costs and restore profit growth, people close to the situation said that Citigroup Incorporated (NYSE: C) is likely to today identify up to $400B in non-core assets that could be sold. Additionally, the Financial Times reported that Citigroup CEO Vikram Pandit will confirm his pledge to cut the bank's cost base by about 20% at a meeting with analysts today. Sources familiar with the matter believe Pandit will dismiss calls for a break-up of the company.
MOST NOTEWORTHY: Northrop Grumman, Phase Forward and Celestica were today's noteworthy upgrades:
Cowen upgraded Northrop Grumman (NYSE: NOC) to Outperform from Neutral following the Q1 report based on accelerating growth. Shares were also upgraded at JP Morgan to Overweight from Neutral.
Friedman Billings upgraded Phase Forward (NASDAQ: PFWD) to Outperform from Market Perform following the solid Q1 report and views guidance as beatable.
CIBC raised Celestica (NYSE: CLS) to Sector Outperformer from Sector Performer following Q1 results, citing end markets that look stable.
OTHER UPGRADES:
JP Morgan upgraded the Consumer Discretionary Sector to Overweight from Underweight.
Wendy's (NYSE: WEN) was raised to Neutral from Sell at Goldman.
What Countrywide Financial Corporation (NYSE: CFC) knew about its mortgage borrowers, and how it handled that information, is under review by Federal investigators, according to the Wall Street Journal. Some of their findings reveal that Countrywide had questionable information, which it then put together many of those mortgages into securities, and sold them to investors.
The Financial Times reported that News Corporation (NYSE: NWS) CEO Rupert Murdoch dashed the hopes of Yahoo! Inc (NASDAQ: YHOO) executives seeking an alternative to Microsoft Corporation's (NASDAQ: MSFT) $40B offer after Murdoch endorsed the view of analysts and investors that it could not match the value offered by Microsoft.
OTHER PAPERS:
According to General Motors Corporation (NYSE: GM) president and COO Frederick A. Henderson, the New York Times reported that the auto maker will not intervene in the dispute between parts supplier American Axle and Manufacturing Holdings Inc (NYSE: AXL) and the United Auto Workers union. Given that the strike has not yet hurt the company's ability to sell vehicles, Henderson said company officials "just have to keep to our own knitting."
Boeing Co. (NYSE: BA) and Airbus go toe to tor for almost very major commercial airline contract in the world. They haul each other into court over international trade practice questions. For pure blood sport, the competition can hardly be matched.
Over the course of the last week, the battle between the two companies moved up a notch as the Air Force gave a $35 billion tanker program to Northrop Grumman Corp. (NYSE: NOC) and EADS, the parent of Airbus. Members of Congress may try to keep the deal with Boeing, and the issue should be messy for several months.
While Boeing and Airbus beat the living daylights out of one another, China is planning to begin to build its own large commercial aircraft. China is one of the biggest markets for the two airplane company leaders, and as the need of big jets there increases, the Asian company was going to be a meal ticket that might last for decades.
Things are not going as planned. According to The Wall Street Journal (subscription required), "China has confirmed plans to set up a company to make large passenger airplanes." The paper also writes that Boeing thinks China will need over 3,300 new jets by 2026.
China could be making its own planes by then, leaving Boeing and Airbus to bicker over military contracts.
Douglas A. McIntyre is an editor at 247wallst.com.
BusinessWeek reports that Boeing Inc.'s (NYSE: BA) loss to Northrop Grumman (NYSE: NOC) and EADS for the $100 billion contract for Air Force tankers -- aircraft that refuel fighter craft while they're in the air -- was a no-brainer from the Air Force's perspective.
BusinessWeek quotes Loren Thompson, a Lexington Institute defense analyst, who concluded that "Northrop Grumman's victory was not a close outcome." Here are two reasons he cited:
Northrop offered more bang for the buck. While both Boeing and Northrop Grumman satisfied requirements established by the Air Force, Northrop was clearly the better buy. With Northrop, the military could have "49 superior tankers operating by 2013," Thompson said, while Boeing's proposal would give it "only 19 considerably less capable planes" by then.
Boeing's Tankers did not perform as well as Northrop's. "Boeing didn't manage to beat Northrop in a single measure of merit" -- not in flight range, fuel capacity, speed of delivery, or cost. "Boeing would have to find a lot of problems to overturn this outcome," Thompson told BusinessWeek. The Northrop tanker carriers 250,000 pounds of fuel, compared to 202,000 on Boeing's, a crucial difference considering that refueling tankers must often circle for many hours when military operations require.
I'm writing a book about Boeing and if Thompson is right, the loss raises questions about Boeing's competitive vigor. Not winning this $100 billion deal is obviously not a help for its stock either.
MOST NOTEWORTHY: Northrop Grumman, Groupe Danone and MercadoLibre were today's noteworthy upgrades:
Oppenheimer upgraded shares of Northrop Grumman (NYSE: NOC) to Outperform from Perform after the Pentagon selected the company over Boeing (NYSE: BA) for the newly designated KC-45A Aerial Refueling Tanker with a potential value of $35B.
Citigroup upgraded shares of Groupe Danone (OTC: GDNNY) to Buy from Hold on valuation, as they believe the sell-off on commodity cost concerns is overdone.
MercadoLibre (NASDAQ: MELI) was raised to Outperform from Sector Perform at RBC Capital, as they believe MELI's long-term thesis is more compelling now vs. six months ago and notes favorable reaction to Mercado Pago v2.0.
Royal Bank of Canada (NYSE: RY) is expected to launch the first covered bond from the country next week, the Financial Times reported. The bank is targeting a benchmark-sized issue worth $1.4B-$4.2B.
The Financial Times also reported that Indian conglomerate Tata has concluded an agreement with Virgin Mobile USA Inc (NYSE: VM) to launch a cellular phone brand in India. The brand, called Virgin Mobile in India, would target young Indians under a franchise agreement with Tata Teleservices.
WEB SITES:
Bloomberg reported that former JP Morgan Chase & Co (NYSE: JPM) Vice Chairman Donald Layton is expected to be named E*Trade Financial Corporation's (NASDAQ: ETFC) new CEO. In an interview, Layton said he may consider a sale of the troubled online brokerage if it "made sense" for shareholders.
The New York Times reports that Boeing Co. (NYSE: BA) has lost a $40 billion deal for airborne tankers that refuel fighter jets for the Air Force. The winning suppliers are Northrop Grumman (NYSE: NOC) and EADS, the parent of Boeing's arch rival, Airbus.The deal, which puts a critical United States military contract partially into the hands of a European company, calls for spending up to $40 billion to replace the Air Force's aging aerial tanker fleet of 535 Boeing 707s and DC-10s.
This comes as a major blow to Boeing. Its CEO, James McNerney, had been brought into his position in 2005 to clean up the company after several significant ethics problems -- including a deal to hire the Air Force's second ranked weapons buyer, Darleen A. Druyun, her daughter and son-in-law in return for steering the tanker contract and billions of dollars of other Air Force business to Boeing. Soon after joining Boeing at a $250,000-a-year post, Druyun and Michael Sears, Boeing's former CFO, pleaded guilty in the scandal and received prison terms.
Since I am working on a book on Boeing, I was very focused on this contract award. A win would have been a big benefit to shareholders after McNerney's efforts to cure Boeing of its ethics problems. The loss of this contract -- which could total $100 billion -- is a big setback.
Boeing's stock fell $2.01 during the market today and an additional $2.68 after hours.
President Bush recently submitted a $3.1 trillion dollar budget to congress with the biggest proposed increases in defense spending, and homeland security. The Pentagon would get a $35 billion increase to $515 billion for core programs, about 7% with war costs additional (but how much is additional?) This further supports my investment posture for this year and next that the defense sector is the place to be as I posted earlier today and many times over the past few months -- the BIG BUYS.
Some of our big defense contractors, all of which should benefit to some degree include: Boeing (NYSE: BA), General Dynamics (NYSE: GD), Lockheed Martin (NYSE: LMT), Northrop Grumman (NYSE: NOC), Raytheon Company (NYSE: RTN), and United Technologies (NYSE: UTX). I am not suggesting that you jump into these stocks immediately, but you should add them to your watch list. Perhaps, for some investors dollar cost averaging into them over six months would make sense. Each has a varying degree of exposure to defense spending. For example, United Technologies is the parent of Sikorsky helicopters which makes the Black Hawk. Lockheed Martin and Boeing make fighter jets. Raytheon makes defense electronics and missile while General Dynamics and Northrop Grumman supply warships to the US Navy. Northrop also makes aerial vehicles that are being used in the Iraq War.
"The weak start to 2008 has left many investors scrambling for a safe haven in which to stash their cash," notes Jocelynn Drake, who sees the defense sector as one such haven.
The analyst with Schaeffer's Investment Research explains, "The recent losses suffered by many of the defense-sector components has brought them back to long-term support, creating potentially strong buying opportunities."
"In addition, they are all currently resting right near support at their ascending 10-month moving averages. These stocks have benefited from this long-term support level and could use their respective trendlines as springboards to launch them on the next leg of their uptrends.
"What also makes these stocks very appealing from a bullish perspective is that short-term options players are very skeptical of the stocks' outlooks. As a result, options speculators have loaded up on bearish bets toward these securities in an attempt to call a top to their rallies.
The New York Times reported that court records have shown that troubled mortgage lender Countrywide Financial Corporation (NYSE: CFC) fabricated documents related to a Pennsylvania homeowner bankruptcy case.
Alleging that its lending practices discriminated against minorities, leading to foreclosures, the Baltimore City Council is suing Wells Fargo Bank and Company (NYSE: WFC), the New York Times reported.
MOST NOTEWORTHY: UBS AG, Commerzbank , Trico Marine Services, Optimal Group and Mediacom were today's noteworthy upgrades:
JP Morgan upgraded shares of UBS AG (NYSE: UBS) to Overweight from Neutral on valuation, as they believe the risk/reward is now attractive.
Commerzbank AG (OTC: CRZBY) was upgraded to Equal Weight from Underweight at Morgan Stanley, as they believe the company has eliminated much of the uncertainty on asset quality.
Jefferies upgraded shares of Trico Marine Services Inc (NASDAQ: TRMA) to Buy from Hold and raised their target to $46 from $40 to reflect the growth potential brought on by the company's purchase of Active Subsea ASA.
B. Riley raised its rating on Optimal Group Inc (NASDAQ: OPMR) to Buy from Neutral to reflect the company's proven management team, acquisition of WowWee and strong balance sheet.
Citigroup upgraded shares of Mediacom Communications Corporation (NASDAQ: MCCC) to Buy from Hold on valuation following the recent pullback, as they now think the stock is oversold. Citigroup thinks Mediacom will generate free cash in 2008 and they like the pace of buybacks.
Boeing may abandon plans to sell its aerial refueling tanker internationally if it loses its protest of a U.S. Air Force decision to buy $40 billion worth of tankers from a competitor, The Wall Street Journal reported Wednesday [subscription].
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