Boeing Wins $700M FMS Contract From Air Force For SDB I

Aircraft major The Boeing Company’s (NYSE:BA) Defense, Space and Security division recently won an indefinite-delivery/indefinite-quantity foreign military sales (FMS) contract from the Pentagon for the production of Small Diameter Bomb Increment I (SDB I) weapons systems. Valued at $700 million, the contract was awarded by the Air Force Life Cycle Management Center, Eglin Air Force Base, FL.

As per the terms of the contract, the Air Force will supply SDB I weapons of Lot 12-14 and associated carriage systems. Work is expected to be completed by Dec 12, 2021 and will be executed in St. Louis, MI. The contract will use fiscal 2015 and 2016 procurement funds. FMS funding of $130 million was already obligated when Boeing received the contract.

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A Brief Note on SDB I

Boeing’s GBU-39/B Small Diameter Bomb (SDB) is a next-generation strike weapon system that can be deployed from external as well as internal carriage systems. This low-cost and low collateral damage weapon comes with an Advanced Anti-Jam Global Positioning System-aided Inertial Navigation System (AJGPS/INS) that guides it toward the coordinates of a stationary target.

With a range greater than 60 nautical miles, SDB’s precision guidance and compact size allow prosecution of more targets per sortie. In Aug 2003, following a two-year competitive phase, the Air Force selected Boeing to develop and build the SDB system. The company, along with the Air Force SDB I team, successfully delivered the weapon system ahead of schedule. Note that SDB I was first operationally deployed in 2005. Also, the SDB was first dropped in combat during a close air support sortie in Iraq, on Oct 5, 2006 and has been used on the F-15E ever since.

Our View

Being one of the largest defense contractors in the U.S., Boeing’s SDB is also one of the very few weapon systems of its kind available in the market. The company serves the U.S. defense industry and its allies by producing, integrating and supporting precise, long-range and focused munitions capabilities. Currently, Boeing is designing the tail kit assembly for the B61-12, which will modernize guidance capability for the weapon under a contract that was awarded by the U.S. Air Force in Nov 2012.

We note that in the second quarter of 2016, the company’s Defense, Space and Security business division garnered revenues of $7.2 billion buoyed by solid underlying operating performance. We expect the latest FMS contract to drive growth at the segment in the coming quarters and beyond.

However, we remind investors that Boeing’s rival, Raytheon Company (NYSE:RTN) – another defense giant in the U.S. – manufactures GBU-53/B Small Diameter Bomb Increment II (SDB II), which is an advanced weapon system in the line of the former’s GBU-39/B SDB I. Notably, SDB II is an air-launched, net-enabled, precision strike weapon that can be used to attack both moving and stationary targets, even in adverse weather conditions.

Stocks to Consider

Both Boeing and Raytheon currently carry a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the aerospace and defense sector include Engility Holdings, Inc. (NYSE:EGL) and Ducommun Inc. (NYSE:DCO) , both of which sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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