As Problems Mount, Boeing Should Spin Off Defense Operations

By Douglas A. McIntyre Updated Jan 30, 11:34AM EST · Published Jan 6, 6:30AM EST

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As Problems Mount, Boeing Should Spin Off Defense Operations — © courtesy of Boeing Co.

Boeing Co. (NYSE: BA | BA Price Prediction) was hit with more bad news: there may be design problems in its already grounded 737 Max. The new trouble may have to do with how the plane is wired. Pilots of the airplane also may need additional training, which could add months to the date when the plane gets back into service. Shareholders, who suffered through 2019, may face similar trouble this year.

Boeing shares rose only 1% last year, compared with a 30% gain for the S&P 500. The 737 Max debacle has ruined the financial results of Boeing’s commercial division. However, its defense, space and security units have been an ongoing success. Boeing has the chance to salvage investor results if it spins off these businesses into a new publicly held corporation.

Boeing’s defense, space and security businesses compete with Lockheed Martin Corp. (NYSE: LMT), Northrup Grumman Corp. (NYSE: NOC) and a few other companies that rule the defense and aerospace sector. The stocks of these companies did particularly well in 2019: Lockheed Martin’s shares were up 47%, and Northrup Grumman’s were higher by 40%.

In the third quarter, Boeing’s revenue dropped 21% to $20 billion. Operating income fell 43% to $1.26 billion. Revenue for its Commercial Airplane division dropped 41% from the same period last year to $8.2 billion. The division had an operating loss of $40 million, against an operating profit of $2 billion in the period in 2018. Revenue for Boeing’s defense, space and security unit rose 2% to $7 billion. Operating income was $755 million, compared to a loss of $247 million in the year-ago period.

Boeing’s defense, space and security business has as its primary customers U.S. and overseas governments. The division’s backlog for defense and services is $62 billion, of which 30% is from customers outside America. Revenue from these operations is almost certain to be steady or to rise. Boeing commercial airplane business could suffer from falling revenue and operating losses for years.

Boeing’s new CEO, David L. Calhoun, recently said, “I strongly believe in the future of Boeing and the 737 MAX. I am honored to lead this great company and the 150,000 dedicated employees who are working hard to create the future of aviation.” However, Boeing’s future is not with the 737 Max. It is with Boeing’s defense, space and security division. As a separate company, it would be among the 20 largest defense companies in the world.

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About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.