Boeing’s $91 Tailwind Comes From Strong Global Aircraft Demand

by Trefis Team
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Boeing’s (NYSE:BA) first quarter earnings were better than expected as the company posted a strong performance in its commercial and defense businesses. The revenues of Boeing’s commercial airplane division rose 54% on the back of higher airplane deliveries while revenues at Boeing’s defense unit increased 8% as the company offset spending cuts of Pentagon by finding customers in foreign countries. Profit for the company rose by 58% as margins increased due to better execution in both production and services segment by the company.

Boeing’s principal global competitors include Lockheed Martin(NYSE:LMT), Northrop Grumman (NYSE:NOC) and Airbus (EPA:EAD). We currently have a price estimate of $91 for Trefis, which is about 25% above the current market price.

See our full analysis of the Boeing stock here

Focus on commercial aviation of emerging countries yields results

Boeing delivered 137 commercial planes in the last quarter, an increase of 32% from the year earlier. It also booked new orders worth $21 billion, taking the total backlog to $308 billion.

The growth in new orders was primarily driven by low cost airlines in emerging economies that are looking at expanding their fleet to service the booming air demand in their home countries. Boeing had identified the demand for aviation in emerging geographies as one of the key drivers of growth in the coming decade and directed its sales and marketing efforts towards utilizing this opportunity. Another factor driving growth for Boeing is its new fuel efficient 737 MAX plane, which has garnered 301 orders in this quarter alone from low cost airlines across the world.

Boeing’s profit margins in this segment increased by almost 2.7% as the spending on research and development declined and there were fewer deliveries of low margin 787 and 747 aircraft. The company also improved its production and services efficiency. These margins, however are unlikely to persist in future as the new low margin planes will increasingly form a bigger chunk of the deliveries.

Defense segment driven by foreign sales

Boeing’s defense revenues increased by 8%, primarily due to initial revenue for the F-15 contract with Saudi Arabia. In 2010, Boeing had entered into a contract with Saudi Arabia to deliver 84 new F-15 jet fighters, upgrades to 72 of Saudi Arabia’s existing F-15s, 70 Apache helicopters and 36 AH-6i light attack helicopters.

A number of other defense products were also included in the deal. Since the Pentagon has started implemented its budget cuts, Boeing has been increasingly targeting foreign countries for its defense sales. This strategy was successful in the quarter as the company registered a few key business wins. It received domestic and international contracts for C-17 Globemaster III, a F-15 Eagle performance based logistics contract from Republic of South Korea and a Asia Broadcast Satellite / Satmex contract launch of 702SP product line.

Profit margins for this division increased marginally, from 8.8% to 9% due to a more favorable product mix.

Boeing Capital Corporation fails to impress

Boeing Capital Corporation’s portfolio declined to $4.2 billion as their were significant run off and asset sales without any new aircraft volume. The group delivered pre tax earnings of $38 million which is a significant decline from $52 million the company reported in the first quarter of 2011.  The company needs to trim its balance sheet further and reduce risky assets, so that its profitability can increase.

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