If It Delivers Profit, Boeing (BA)’s Defense Franchise Can Buffer Its Commercial Recovery

On September 4, Boeing Co (NYSE:BA) secured a $241.3 million sole-source contract from the U.S. Navy, covering repairs for F/A-18E/F Super Hornets and EA-18G Growlers. This contract extends through September 2032, underscoring the company's well-established defense installed base as a source of recurring demand during its recovery in the commercial aircraft segment.

However, the investment thesis for BA hinges not only on winning defense contracts but also on those contracts generating sustainable operating profit and free cash flow while the commercial aircraft segment improves. Boeing has recently added to its Pentagon contract list with a $109 million sole-source order for 76 F/A-18 outer-wing panels, set for completion by October 2031.

Moreover, the U.S. has approved a potential $5 billion Saudi Arabian purchase of JDAM-ER weapons, with Boeing designated as the principal contractor. Despite Q2 revenue growth of 8% to approximately $24.6 billion, driven by 171 commercial aircraft deliveries, the Defense, Space & Security segment reported a $15 million operating loss.

The commercial segment, however, saw a 8% revenue increase to $11.8 billion and a narrowing loss from operations to $322 million. The bullish case for BA hinges on defense and services maintaining demand and profitability while higher commercial deliveries lead to better margins and free cash flow. The bearish scenario, however, suggests that even as defense revenue grows, it may not yield meaningful earnings if program charges persist, and a sluggish commercial recovery could further strain the company's capital.

Currently, hedge funds' interest in BA has waned, with the number of holders declining to 90 in Q2 from 99 in Q1. Despite the uncertainty, BA's defense franchise presents a credible potential buffer, but investors still need evidence that it can produce profitable cash flow.