On March 27th I wrote that although Boeing (BA) had lost its bid to provide the Air Force with a fleet of in-flight refueling tankers, the company still has a lot of upside. Well, Boeing protested the $35 billion contract that was awarded to Northrop Grumman Corp. (NOC) and EADS, so both sides sent lobbyists to Washington to have their say. The Government Accountability Office came down on the side of Boeing; its decision reflected what it saw as a botched bidding process that was not fair and needed to be revisited. While the ruling is not binding, the Air Force is likely to reexamine the bidding process.

Starting from scratch is not a realistic possibility as the controversy has become increasingly entangled in politics, but taken at face value it has at least putting Boeing back in the game for this large contract. The contract’s size is quoted at $35-$40 billion, but the average USAF tanker is now 47 years old and there is speculation that the contract could in fact grow to be much larger than first estimates.  Christopher Hinton of MarketWatch estimated that the contract could mean over $1 trillion of revenue for the winning company over the next 50 years.

While there is no guarantee that Boeing is going to win the contract in the second round of bidding, the stock price has gotten an almost 3% boost today on the possibility. The USAF is expected to announce a reopening of the bidding because of the high profile nature of the conflict.  The original decision was as surprise for Boeing as they did previously have a stranglehold on previous USAF tanker contracts.  Clearly, there is a lot riding on the contract, but the USAF is under pressure to get the deal done quickly to because they need to replace the aging fleet of tankers in use right now.

We will continue to monitor the situation closely as the USAF decision will have impact on both sides’ stocks, and the effect will only be amplified by the buzz that this controversy has generated. As with the March 27th piece, we still think that Boeing stock is undervalued. If Boeing wins this contract it would be a further improvement to fundamentals, but for right now at current levels we have a long term price target $87-$92.