BY : Forbes



There's no doubt that March has been a turbulent month for Boeing--the company recently filed a formal protest of the award of a $35 billion contract for air force refueling planes to a team headed by Northrop Grumman and the European Aeronautic Defence and Space Co.

Then the leasing company that's the largest customer for Boeing's (nyse: BA - news - people ) 787 Dreamliner gave word that structural changes to where the plane's wings attach to the fuselage would further delay the 787's first flight by three to six months.

In the past 30 days, Boeing shares have slid 8.13% vs. a flat S&P 500.

But smoother skies could be ahead, thanks to prospects for an extended civilian aerospace up-cycle and the little-noted possibility that Boeing could see an increase in foreign military sales.

Make no mistake: Boeing's big tanker loss will remain in the news and in investors' consciousness for months. Government auditors have only until June 19 to rule on Boeing's bid protest. But their ruling won't end the talk; as the November election approaches, protectionist politicians will continue to rant about the loss of defense jobs to Europe.

And yes, chatter over a possible 787 delay is also likely to make investors jittery. When word spread about design-related delays to the program, it knocked $3 off Boeing shares, dropping them from $76 to $73. (Boeing itself has thus far refused to fess up to the delay, saying, "It is normal during the development of a new airplane to discover the need for design enhancements.")

But the March 18 disclosure by International Lease Finance of the 787 design flaw merely confirmed existing concerns among most Wall Street analysts and institutional shareholders who track Boeing closely; it didn't actually raise new worries.

In fact, four days before, Morgan Stanley's (nyse: MS - news - people ) defense analyst Heidi Wood told private clients: "Clearing this obstacle should enable the stock to trade more on the health of the cycle than on 787 headlines."

In other words, expectation of a delay was already pretty much priced into the stock. Yet there's another negative priced in that shouldn't be, argues Wood, who now sees a 24% upside in Boeing stock.

Her view is that the market--based in part on forecasts from Goldman Sachs (nyse: GS - news - people ), Morgan Stanley and others about U.S. troubles spreading--is wrongly expecting that the entire aerospace sector will ultimately get burned by the U.S. credit market's meltdown.

You'd think that export-heavy aerospace, of all U.S. industries, would be immune to problems radiating from the U.S. subprime mess. But one fear is that foreign aircraft purchasers might get squeezed by credit tightness; indeed, the cost of borrowing euros for three months is near a seven-year high.

Wood argues, however, that a big chunk of Boeing's seven-year backlog would need to evaporate quickly for the market's fears--and Boeing's current price--to be justified. And she doesn't see that happening.

Roughly one-third of the backlog comes from buyers in Asia and the Middle East, where booming tourism and airline growth may outweigh any temporary impact spreading from the U.S.

Another long-term plus for Boeing: While the focus has been on the lost tanker deal, its military business could get a boost from another area. Fresh competition from Russia and Chinese eager to sell cheaper fighter jets to Asian customers could result in sooner-than-expected exports of the F-22 Raptor.

Lockheed-Martin is the prime contractor on the F-22, but Boeing provides the wings, aft fuselage, avionics integration and all of the pilot and maintenance training systems for the $360 million-per-unit, fifth-generation F-22 fighter.

Given that Russia has already teamed up with India to co-develop and co-produce a version of Moscow's fifth-generation fighter, and that China is co-developing with Pakistan a very low-cost fourth-generation fighter, the U.S. may decide to try and protect market share and lift an export ban on F-22s. Currently the U.S. is the sole producer of fifth-generation fighters, the world's most advanced.

At least that was a possibility U.S. Defense Secretary Robert Gates held out on a recent trip to Australia, a U.S. ally eying new warplanes. The Pentagon may nudge Congress to lift the ban--although the matter could carry over to the next administration, say defense industry analysts. It's hard to calculate an international market for F-22s, but it's certainly big; the Indian air force alone is willing to spend $12 billion on 126 fourth-generation jets.