Boeing is reportedly considering selling a portion of its defense business, as per Bloomberg’s report on Tuesday. This development has captured the attention of Wall Street and investors, although specifics about the potential sale remain unclear at this stage. Given the uncertainty, investors should stay vigilant and monitor the situation closely.
Boeing’s defense segment, known as Boeing Defense, Space & Security, recorded sales of approximately $25 billion in 2023, but it also incurred an operating loss of about $1.8 billion. This marked the unit’s second consecutive annual loss, attributed partly to challenges such as fixed-price contracts and higher-than-expected inflation, which have affected various defense contractors in recent years.
Before the pandemic, the defense business boasted an average annual operating profit of around $2.3 billion over five years, translating to a profit margin of approximately 9%. Analysts anticipate sales to reach roughly $25.6 billion in 2024, showing a modest increase of around 3%, with a projected positive operating profit of about $546 million.
Boeing’s history of mergers and acquisitions (M&A) has been relatively limited. One notable transaction was the sale of what is now Spirit AeroSystems to Canadian private-equity firm Onex in 2005. Interestingly, Boeing is currently contemplating the acquisition of Spirit Aero to enhance its control over the manufacturing process. Additionally, Boeing made a significant investment in parts distribution in 2018, amounting to approximately $4.2 billion.
A potential sale of part of its defense business could yield billions, providing Boeing with resources to reduce its substantial debt burden. As of 2023, Boeing’s total debt stood at around $54 billion, significantly higher than the pre-pandemic level of about $14 billion. While Boeing struggled to generate positive free cash flow in 2019, 2020, and 2021, it reported substantial improvements in 2022 and 2023, with free cash flow reaching $2.3 billion and $4.4 billion, respectively. Analysts expect this positive trend to continue, forecasting $5 billion in free cash flow for 2024.
Despite these potential upsides, Boeing’s stock has faced challenges, experiencing a year-to-date decline of approximately 31%. Much of this decline is attributed to ongoing issues with the 737 MAX program, including incidents such as an emergency-door plug blowout on a 737 MAX 9 jet operated by Alaska Air in January 2024. These incidents have raised concerns about Boeing’s quality control and manufacturing processes, leading to increased scrutiny from regulatory authorities like the Federal Aviation Administration.