Al Root

The Navy could decide on a sixth-generation fighter jet this week. Boeing and Northrop Grumman are the two leading candidates.

Regardless of who wins, investors will have to judge how much to move shares of both companies. And it isn't easy to figure out what multidecade defense programs are worth today.

On Tuesday, Deutsche Bank analyst Scott Deuschle estimated the "net present value" of the Navy's F/A-XX program, as it is currently called, from $1.3 billion to $2.3 billion. At $1.3 billion, that's about $9 to $16 a share for Northrop and $2 to $3 a share for Boeing.

Deuschle's net present value represents all the cash flows projected for the plane program, after expenses, discounted back at an interest rate to arrive at one tidy number. It's one way to value the program.

"This Navy program is likely to be positioned as an F-18 replacement," wrote Deuschle.

Boeing makes the F-18, and the end of production for that plane is already planned. Deuschle ranges of value assume between 175 and 500 jets are purchased over time.

Jet programs have long lives. Deuschle models cash flows out to 2080. His choice makes some sense. Versions of the F-18 have been flying since the 1980s. It will fly for many more years while new jet production ramps up. The current F-18s are redesigned versions of the original.

A discounted cash flow is one way to value defense programs.

Last week, Boeing won the Air Force's competition for a new fighter jet. Jefferies analyst Sheila Kahyaoglu estimates that could add about 25 cents a share to Boeing's earnings over time. Her number is based on $4 billion in annual revenue, early in the program's life, with profit margins of about 5%. At 20 times earnings, 25 cents a share is worth $5 a Boeing share, added Kahyaoglu.

Earnings with an earnings multiple is another way to value wins.

Kahyaoglu's value also works out to about $4 billion in market capitalization. On Wednesday, since the Air Force decision, Boeing's market value is up about $7 billion. Lockheed Martin lost the bid. Its value was down about $6 billion.

That's a little more than Kahyaoglu's value, but the values mirror one another. The change in value also shows that investors expected Lockheed to win.

Adding expectations to analysis makes valuing programs a little more difficult. Still, the rule of thumb: Wins are good and losses are bad.

The Navy's and Air Force's new jets will be sixth-generation fighters. Generations refer to the technology and capabilities of certain planes; the F-35 and F-22 are fifth-generation fighters. Russia and China have fifth-generation fighters, and China has shown what appears to be a prototype of a sixth-generation jet.

More advanced fighters have better weapons, software, maneuverability, and improved stealth technology. They are also expensive. The F-35 can cost more than $100 million to purchase and another $500 million to $700 million to maintain and operate over its multidecade service life.

The total cost to the U.S. military for the F-35 will approach $2 trillion, according to government estimates. The F-35 should be roughly 10 times as large as the Navy and Air Force programs with more than 1,000 F-35s in service and more than 1,000 yet to come.

On Wednesday, Boeing stock was down 0.8% and Lockheed Martin shares were up 1.6%. Peer Northrop Grumman was up 0.6%. The S&P 500 was off 0.4% and the Dow Jones Industrial Average was up 0.3%.

Write to Al Root at allen.root@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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March 26, 2025 10:37 ET (14:37 GMT)

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