Could Boeing Be Set To Emerge As A Leading Defense Stock?

Major global events can - more often than not - carry profound ramifications for stocks and shares. We saw with the emergence of Covid-19 that healthcare and remote technology stocks could experience exponential growth as the rollout of vaccines and a push towards working from home became more commonplace. Now, as geopolitical tensions spill over in Eastern Europe, we’re set to see significant movement among defense stocks. 

Unsurprisingly, defense stocks have emerged as key outperformers across a disappointing start to 2022 for Wall Street and beyond. Despite trailing the S&P 500 for virtually the entirety of 2021, the S&P 500’s aerospace and defense index ended February by posting twice as much annual growth as the broader market. 

(Image: Reuters)

As the chart above illustrates, defense stocks have rallied at such a rate that they’ve provided a small uptick in a wider market that’s been dwindling since the beginning of the year. However, despite a surge in the value of stocks that specialize in defense, so far Boeing BA has struggled to keep up the pace. 

As we can see from Boeing’s New York Stock Exchange performance over the past five years, the company has retraced in the wake of Covid-19 back to levels that haven’t been seen since early 2017. 

Although this may be a cause for concern, it may also represent a buying opportunity for retail investors who have long been waiting for a stock with strong fundamentals and growth potential following the recent challenges of the current economic climate. 

The cause for Boeing’s recent underperformance

So, as a stock that deals heavily in defense, why has Boeing been struggling lately? The answer is primarily down to the company’s better known speciality, commercial aviation. Widespread uncertainty around the travel and tourism industry has impacted Boeing’s recovery from the pandemic and has kept the stock anchored as other defense leaders have grown. Furthermore, conflict in Europe is expected to impact air travel throughout the continent over the foreseeable future - throwing tourism into further doubt. 

Additionally, Boeing has recently confirmed that it was forced to close its offices in Kyiv, whilst pausing its airplane training program at its Moscow campus too. 

Although its stock has endured a slow first quarter in 2022 so far, Boeing’s defense, space, and security services bring in around $26.5 billion in annual revenue - making it an industry leader in its own right. 

Current events in Europe are likely to cause widespread reviews of defense budgeting in nations around the world. This will invariably case a mass growth in interest regarding rearmament, driving more government spending on Boeing services. 

“Boeing is best known for its commercial aircraft, but its defense business is big enough to be among the big companies in the industry. Boeing produces several different aircraft and helicopters for the Pentagon and is also involved in space research,” explained Maxim Manturov, head of investment advice at Freedom Finance Europe. 

“The company's defense business has also expanded into autonomous submarines and other products. Boeing BA has the potential to grow to an average target price of $261 - about 31% upside.”

Driving defense stock growth

As the conflict in Europe began, US defense stocks have begun to soar. Companies like Northrop, General Dynamics and Raytheon have all posted record highs since the beginning of February, whilst IBD’s defense-based industry group grew by 9%. 

Namely, javelin anti-tank missiles from Lockheed Martin LMT and Raytheon have been part of a recent $350 million weapons package approved by the Biden administration for deployment in Ukraine. This recent deal comes on top of a US security support package in excess of $2.7 billion arriving in Ukraine since 2014. In 2021, more than $650 million was delivered to support defense spending. 

In Europe, Germany has pledged that it would send 500 Raytheon Stinger missiles and 1,000 anti-tank missiles. These supplies come in addition to 2,700 Soviet-era, shoulder-fired Strela missiles - also promised to Ukraine. However, Germany’s deal must first find the approval of its Federal Security Council. 

According to analysts, these recent movements have completely shifted defense spending dialogue from concerns surrounding Afghanistan to more global matters. 

"It's very early days but I think it will be interesting to see how this evolves and what that portends for European defense and security spending and posture and acquisition in the next year," said Carisa Nietsche, of the trans-Atlantic Security Program at the Center for a New American Security.

The emerging crisis in Eastern Europe has sent shockwaves around the world. At a time when it appeared that cyberwarfare would become a more dominant source of conflict, events in Ukraine have shown that the specter of war still looms large. 

Conflict invariably carries a significant impact on the stock market. Whilst there are certainly more pressing concerns underway across the world than the investing climate, it’s worth acknowledging that ongoing events in Europe will carry a boost for defense stocks - carrying the kind of upward movements that retail investors haven’t seen since the post-Covid-19 tech and vaccine stock boom. 

Although Boeing hasn’t experienced the early rallies that its counterparts have undertaken, the company’s $26.5 billion annual intake on services concerning defense is likely to create a buying opportunity for retail investors.