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. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!