Boeing ( BA) continues to lose backers on Wall Street after Credit Suisse First Boston dropped its rating on the company, sending shares down 2.1% Monday.

When analyst Jim Higgins assumed coverage of Boeing at his firm, the first thing he did was downgrade its stock to neutral from outperform on Friday afternoon. In addition to dropping his rating, Higgins lowered his 12-month price target to $44 from $50, telling investors that the company's Integrated Defense Systems unit, or IDS, could be victimized by federal budget cuts. In reaction, shares of Boeing were off 83 cents to $38.60 on Monday.

"The crux of the downgrade is a more pessimistic view of the commercial aircraft cycle, a concern that defense spending will begin to peak in coming years, and with it, flatten out growth prospects for Boeing's IDS unit," said Higgins.

Higgins isn't alone. On Feb. 9, Standard & Poor's equity research downed Boeing's rating, and now most of Wall Street is equally dour on the company's prospects, with nearly 80% of the analysts who cover it rating Boeing at hold or sell.

The major reason for the pessimism is that Boeing, a huge conglomerate with $50.5 billion in total sales in 2003, is no longer growing as fast as it once did, seeing erosion in nearly all of its businesses. This year, analysts expect the company to see revenue grow by 2.6%.

Despite the rise of geopolitical events in Iraq and Afghanistan that are placing demands on the U.S. military, Higgins sees military spending flattening out or even dropping in the years to come. Given the rise in the national deficit, some discretionary spending will have to be cut -- something that's already happening at the Pentagon, which killed the Comanche attack helicopter program at the end of February. This trend could continue.

"A changing political landscape could reduce or push out spending on more speculative, big-ticket items such as elements of missile defense and the F/A-22 Raptor," said Higgins.

And competition for contracts is heating up, with rival EADS unit Airbus waiting in the wings to pick up business from Boeing. In February, Boeing's $17 billion contract to provide in-flight fuel tankers to the Pentagon was put on hold in the wake of allegations that the company improperly influenced military contracts, which resulted in the resignation of two executives.

With the Pentagon tanker contract on hold, Airbus is making noise that it wants in on the deal. On Friday, Ralph Crosby, chairman of EADS North America, said that if the Pentagon reopens bidding, his company could step in and build the planes. Airbus recently beat a consortium led by Boeing for a $27 billion contract to supply the U.K. with tankers for the next 27 years.

Nonetheless, Higgins said that Boeing's IDS unit is well positioned to win its share of defense contracts, with its Network Systems segment producing more than half of IDS' revenue in 2003. Going forward, revenue from the segment is expected to grow as much as 19% in 2004, driven by homeland security spending, with operating margins expected to expand, hitting 10% by 2005.

Furthermore, with the airline industry in a state of turbulence, Boeing's commercial aircraft unit will continue to suffer. Not only do many airlines have planes parked in the desert, but the industry revenue recovery is showing signs of weakness as airlines add planes back into service. The end result is that growth becomes self-defeating on some level, making many legacy carriers delay and push out orders.

"It is not comforting that more than 18% of Boeing's current order book is supposed to be delivered to U.S. legacy carriers whose desire for those deliveries is, in our view, unlikely to be strong for at least several more years," said Higgins. "More pushbacks, or outright cancellations, of those orders are very real possibilities."

Given the diverse nature of Boeing's business -- it supplies planes to airlines whose business would be devastated by a terror attack and supplies weapons and systems to governments who would boost spending to prevent attacks -- Higgins argues that Boeing may not even be a good defensive stock.

"In that regard, Boeing's diversification is a negative factor that, in an unwelcome scenario, would probably make it among the aerospace and defense group's weakest performers," said Higgins.

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