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Investment Overview for Boeing (NYSE:BA)
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Below are the key drivers of Boeing's value that present opportunities for upside or downside:
Commercial Airplanes EBITDA Margin
Commercial Airplanes EBITDA margin stood at 16.1% in 2007. Due to the combined effects of a global slump in demand, the IAM (International Association of Machinists and Aerospace Workers) strike and continued delays of the 787 Dreamliner and 747-8 programs, margins fell to 11.4% and 4.8% for 2008 and 2009 respectively. However, in 2011, they rose up to 16.6% on the back of demand generated by airlines in developing economies. In 2012, margins declined to 14.3% due to stiff competition with Airbus.
We expect margins for the division to decline marginally over the Trefis forecast period reaching 13.1% by its end. This is primarily due to pressure on the selling price arising out of stiff competition from Airbus. Additionally, margins would be subject to the timely deliveries of aircraft and any development delays will put additional cost pressures.
If margins decline to 12% by the end of the forecast period instead of our expected forecast of about 13.1%, there could be a downside of 10.0% to the price estimate of Boeing's stock.
On the other hand, delays in the Airbus 350 launch can boost margins for Boeing Commercial Airplanes in the future. An EBITDA margin of 14% by the end of the forecast period could lead to a potential upside of slightly over 5% to the ${trefisprice}.
Boeing's share of global commercial aircraft deliveries
Boeing commercial aircraft deliveries represented about 33% of global commercial aircraft deliveries in 2008. This figure rose to about 38% in 2009, 2010 and 2011 and to 44.7% in 2012 as pending orders were fulfilled.
Going forward we expect this figure to decline in the outer years due to entry of new players like China's Comac and Mitsubishi's Regional Jet, and competition from Airbus. However, if the company is able to maintain its current share of global aircraft deliveries then this could provide an upside of around 4% to ${trefisprice}.
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Boeing is one of the largest aerospace firms in world involved in design, development, manufacture, sale, service and support of commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems and services.
Along with Airbus, Boeing is a major manufacturer of 100+ seat airplanes for the worldwide commercial airline industry. It is also the second largest defense contractor for the U.S. government after Lockheed Martin.
Boeing also has a financing division, Boeing Capital Corporation (BCC) which provides financing options to airlines to promote sale of Boeing products.
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The commercial airplanes division remains the single largest contributor to the firm's total value. The key factors responsible for this are:
Established position as one of the largest aircraft manufacturer
Aircraft manufacturing requires significant capital and research and development expenditures. Boeing has made these investments over the last several decades to establish itself as one of the largest commercial aircraft manufacturers.
A large number of airlines in the world operate Boeing planes. These airlines will prefer working with Beoing as long as the company's offerings remain above or at par with its competitors, as switching to another aircraft manufacturer brings added costs such as costs associated with multiple spare part inventory management.
Boeing's share of global commercial aircraft deliveries
Boeing commercial airplane deliveries represented about 44% of global commercial aircraft deliveries in 2012. With deliveries of the 787 Dreamliner having been started, we anticipate Boeing's share of commercial aircraft deliveries to remain stable in the short-term. Total pending firm orders for the B-787 are at around 800 currently, while deliveries against these have recently started. Thus, these deliveries will drive significant growth for the company over the coming years.
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Aircraft demand strongly tied to macroeconomic growth
A decline in passenger and cargo traffic due to the global recession adversely impacted revenues/margins for commercial airlines world over. This in turn affected aircraft demand. Global passenger traffic declined by about 2% in 2009 while EBITDA margins for the Boeing Commercial Airplanes division declined to 4.8% for the same year. As the global economy recovers, we expect that a healthy macro-economic environment should lead to a healthy growth in passenger and cargo traffic, thus keeping up demand growth for commercial aircraft.
Low cost carriers (LCC) to boost single aisle aircraft demand
Low cost carriers, or LCCs, is a fast growing segment in the short/medium haul markets and is increasingly becoming the faster/quicker alternative to other modes of transportation such as railways.
LCC growth is primarily a consequence of increased liberalization in the commercial aviation industry which has reduced entry barriers for regional and private players.
This is especially true for emerging economies such as Asia, where liberalization is being driven by the Association of Southeast Asian Nations (ASEAN) through the Multilateral Agreement of Air Services. Further efforts by ASEAN are directed at forming an "ASEAN Single Aviation Market" or SAM. We expect regulatory hurdles to decline for Asia in the future, which should pave way for additional growth in LCC fleets in these countries, thereby creating additional demand for commercial aircraft's in the future years.
Workforce is highly unionized
Over 40% of Boeing's total workforce were represented by unions. The company experienced a work force stoppage in 2008 due to the IAM (International Association of Machinists and Aerospace Workers) strike. Similar stoppages in the future have a potential to significantly impact business through delays in production and the development of Boeing's products and services.
Increase in fixed price contracts
Approximately 55% of revenues from the Defense, Space and Security (DSS) division are generated from fixed price contracts. With a 2009 directive by the Office of Management and Budget (OMB) to further migrate from cost-based to fixed-price based contracts, we expect the company's DSS division to be subjected to higher risk, as any cost over-runs would directly impact margins under a fixed-price contract (unlike a cost-reimbursement contract, where the contractor is paid for all of its allowed expenses to a set limit plus additional payment to allow for a profit). This trend can significantly impact DSS margins in future years.
US military spending can influence defense-based revenues
Around 75% of the defense, space and security (DSS) division revenues (over $25 billion as of 2012) come from the US government through its agencies such as the Department of Defense and NASA. Owing to this, DSS revenues are largely dependent on US military spending. Any military budget cuts in the future due to budgetary pressures can significantly impact the DSS business for Boeing in the US.
Increase in oil prices
This is the biggest risk which operating airlines, and as a consequence Boeing, faces currently. A rise in oil prices cut into the margins of airlines (Boeing customers), undercut their profits and reduce their ability to place more orders.
Increasing cost of aircraft finance
Aircraft financing which was generally looked upon as a highly secure, low risk investment, is beginning to undergo changes in the aftermath of the financial crisis. The new financial reforms, Basel 3, take a less risk sensitive approach based on other factors apart from the quality of an asset. It is expected that this will increase the cost of liquidity and eventually increase loan pricing.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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