It looks like Boeing (NYSE:BA) will finally be building the U.S. military's newest aerial tanker, not just because it was officially awarded the contract, but because the only real threat in the bidding process - EADS - has decided not to cry foul this time. See, the contract was first given to Boeing in 2004, then to a Northrop Grumman (NYSE:NOC)/EADS duo in 2008 and then back to Boeing a few days ago as part of a long and often unclear assessment process.

IN PICTURES: 5 "New" Rules For Safe Investing

Certainly, congratulations are in order, but the story here isn't the overt one of Boeing's impending new revenue of $31.5 billion for the tankers and up to $100 billion in total revenue for parts and service. Rather, the message investors of any military contractor may want to absorb is this - EADS (on its own this time) simply decided to walk away, leaving the money on the table.

The stated reason for letting it go was simply that the company respected the Pentagon's final decision, and that it couldn't feasibly bid any lower. In reality, though, one has to wonder if EADS recognized that it just wasn't worth the risk now that the U.S. military has finally decided to clamp down on cost overruns.

That Was Then, This is Now
This new tanker deal is a bit different than most military contracts have been up until this point. This is a fixed-cost contract, meaning any cost overruns won't be supported or co-paid by the Pentagon. If Boeing can't do it at its proposed price, that's Boeing's problem, and it will be Boeing's expense.

It's a stark turnaround from the gravy train defense contractors enjoyed in a post-911 world, where budget-busting projects only cost the military more money - not the weapons manufacturer. With funding drying up in a major way for all the Federal government's major needs, there's just no more room for that type of reckless spending. As such, fixed-cost contracts are the new norm.

Not up For the Challenge
The new era of financial constraint poses more than a mere annoyance for weapons builders. In fact, sticking to a budget may require a corporate culture overhaul these companies are simply not able to muster. For proof, look no further than Boeing. Its 787 Dreamliner passenger jet is not only three years overdue, but it's also a stunning 120% over budget.

Other military contractors aren't any more constrained or effective. Defense Department officials have said Lockheed-Martin's (NYSE:LMT) MEADS (Medium Extended Air Defense System) program is on the chopping block due to cost overruns. The same goes for Raytheon's (NYSE:RTN) surface-launched medium range air-to-air missile program, and several other in-development initiatives.

In fact, over the last five years, the Pentagon has spent $300 billion more than it was actually authorized to spend. The next five years won't be the same. It may never be the same again, now that fixed-cost contracts are the new norm.

Bottom Line
The historical attraction investors have had to defense contractors was largely based on the infinitely-deep pockets of the government. With that no longer being the case, the defense sector is just another group of stocks facing the same competitive struggles other companies do. The problem is, that's not a situation they're used to, and they may not handle it well. (For related reading, also take a look at War's Influence On Wall Street.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  7. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  8. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  9. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  10. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center