Boeing To Upgrade Japanese E-767 AWACS Fleet For $403M

The Boeing Co. (BA - Analyst Report) clinched a significant foreign military sales (“FMS”) contract from the Pentagon’s daily funding list on Friday, Feb 13. The contract − valued at $402.8 million – calls for Boeing to upgrade four 767-based airborne warning and control aircraft for the government of Japan.

This is a modification of a previously awarded contact under which Boeing will upgrade four E-767 Japan Airborne Warning and Control System (“AWACS”) aircraft, as well as three ground support facilities. The work is slated to be completed by Jun 30, 2020.

Last October, Boeing began modernizing the Japanese fleet of E-767 AWACS aircraft. The work will allow Japan's AWACS fleet to be more compatible with other AWACS operators in general and the U.S. Air Force AWACS fleet baseline in particular.

With the Pentagon planning 20% in spending cuts for fiscal 2016 that begins on Oct 1, FMS contracts provide a much needed respite for the defense primes. While some see Boeing’s Defense, Space and Security (“BDS”) unit as its weakest arm, let’s not forget that the unit delivered 179 military planes and five satellites last year.

The backlog at the BDS business stood at $62 billion at the end of the fourth quarter of 2014, 36% of which comprised orders from international clients.

Meanwhile, the company is taking several restructuring measures to cut costs and enhance efficiency at its BDS segment given the tepid budget scenario. Recently, Boeing created a new organization – BDS Development – as part of the restructuring of its defense and space business. The move is expected to enhance product efficiency and lower costs for Boeing’s defense customers in addition to maintaining delivery schedules.

Also, the U.S. Department of Defense's FY2016 budget proposal lays special emphasis on space, missile defense, and cyber security on account of rising security threats. Additionally, the proposal has sought funding for the development of the KC-46 tanker. With this, Boeing will likely witness a boost in order flow at its defense unit.

Boeing currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the same sector include Northrop Grumman Corp. (NOC - Analyst Report), Rockwell Collins Inc. (COL - Analyst Report) and Spirit AeroSystems Holdings, Inc. (SPR - Snapshot Report), each carrying a Zacks Rank #2 (Buy).