Boeing's Defense Division: Navigating Stormy Seas Toward a Turnaround?

The Boeing Company (NYSE: BA) has long been a bellwether of American industrial might, yet its defense division has spent years battling headwinds of its own making. From costly fixed-price contract missteps to production delays, Boeing's Defense, Space & Security (BDS) segment has been a drag on profitability. Now, under the leadership of Stephen Parker, interim CEO of BDS since September 2024, the division is embarking on a critical turnaround. The question is whether this shift can stabilize operations, reverse financial losses, and restore investor confidence.

A Turnaround in the Works?

Boeing's defense division reported a revenue decline of 9% year-on-year to $6.3 billion in Q1 2025, but the margin story is more encouraging. Operating margins improved to 2.5%, marking the first quarter without "reach-forward" losses—reserves set aside for future contract overruns—since Q1 2022. This is no small feat: cumulative reach-forward losses for the division had exceeded $18 billion since 2014, a testament to mismanagement in programs like the KC-46 tanker and T-7A trainer jet.

Parker's leadership has been pivotal. A Boeing veteran since 1988, he has prioritized three core strategies:
1. Program Execution Overreach: Tightening control over fixed-price contracts by aligning with suppliers and the U.S. government to mitigate cost risks.
2. Strategic Focus: Shifting resources toward high-margin programs like the F-47 sixth-generation fighter jet (valued at $20 billion) while shedding non-core projects.
3. Operational Efficiency: Leveraging the $8.3 billion Spirit AeroSystems acquisition to streamline production and reduce costs.

The F-47: A Game-Changer or a Gamble?

The U.S. Air Force's award of the F-47 contract—a $20 billion opportunity—is the most visible sign of Boeing's pivot. Parker's team secured this deal by aligning with the Pentagon's Agile Development Office model, which emphasizes iterative design and early risk mitigation. Unlike past fixed-price disasters, the F-47's structure includes government-shared risk and milestone-based payments, reducing Boeing's exposure to cost overruns.

However, execution remains critical. The F-47's success hinges on delivering on-time performance and avoiding technical surprises during flight testing—a challenge Boeing's legacy programs have repeatedly failed. Parker acknowledges this, stating, “It'll be one quarter… [but] we're going to have discovery from time to time.”

Risks Lurking in the Shadows

Despite progress, Boeing's defense division is not yet out of the storm. Two key risks persist:
1. Starliner's Struggles: Boeing's Starliner crew spacecraft, a joint venture with NASA, faces delays and technical hurdles, compounding cash flow pressures.
2. Fixed-Price Relics: Programs like the KC-46 tanker and T-7A trainer jet continue to bleed money. While Parker has halted further reach-forward reserves, resolving these programs' cost overruns will require sustained discipline.

The Investment Case: Buy the Turnaround?

For investors, the calculus hinges on whether Boeing's structural adjustments can outweigh lingering risks. Key positives include:
- Margin Stability: The end of reach-forward losses and improved margins signal operational discipline.
- Strategic Shifts: Focusing on high-growth programs like the F-47 and NGAD (Next-Generation Air Dominance) systems positions Boeing for long-term relevance in a modernizing defense landscape.
- Balance Sheet Repair: Boeing's Q1 2025 free cash flow improved to -$0.8 billion, a marked improvement from Q4 2024's -$2.5 billion, though it remains negative.

Parker's leadership is a critical wildcard. His engineering and program management expertise have already stabilized key divisions, and his willingness to cede non-core projects to subcontractors signals a focus on quality over quantity.

Final Verdict

Boeing's defense division is at a crossroads. While past failures loom large, the structural shifts under Parker—paired with transformative contracts like the F-47—suggest a path to recovery. The stock trades at 5.8x trailing sales, a discount to peers like Lockheed Martin (9.2x) and Raytheon (8.5x), reflecting investor skepticism.

For investors with a multi-year horizon, Boeing presents a compelling contrarian play. The risks are real, but the upside of a stabilized defense division, paired with a rebound in commercial aviation, could deliver outsized returns. Buy, but keep a close eye on F-47 milestones and Starliner's progress.

Note: This analysis assumes no insider information and is based on publicly available data as of June 2025.