Commercial Aircraft Deliveries Will Lift Boeing’s Outlook

Boeing (NYSE:BA) will announce its third quarter earnings this Wednesday, October 24. ^[1] The company has reported strong growth in revenues and net earnings in the first half of this year driven by higher commercial and military aircraft deliveries. Revenues stood at $39.4 billion, up 25.2% y-o-y, and earnings were $2.51 per share, up 21.8% y-o-y in the six months ended June 30, 2012. ^[2] Total order backlog was $354.6 billion comprising of approximately 4,000 airplanes at the end of the second quarter. ^[2]

In the third quarter, we anticipate deliveries against these unfulfilled commercial and military aircraft orders to drive earnings growth. However, earnings will be impacted by cash contribution towards pension liabilities, which have increased significantly for the company due to the historically low interest rates. On the whole, we anticipate Boeing to post strong numbers in its third quarter earnings.

We currently have a stock price estimate of $75 for the company, nearly in line with its current market price.

See our complete analysis of Boeing here

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Commercial aircraft deliveries to continue to drive earnings

Boeing delivered 287 commercial planes in the first half of 2012, comprising more than two-third of narrow bodied 737s. This compares to 222 commercial airplane deliveries in the first half of 2011. ^[2] As a result, revenues for the Commercial Airplanes division of the company increased 43% y-o-y to $22.8 billion in the six months ended June 30, 2012. Earnings from operations also increased 60% y-o-y to $2.3 billion in the same period. ^[2] Backlog for the division stood at $300.4 billion at the end of the second quarter. And we anticipate deliveries against this order backlog to drive earnings growth for the company in the third quarter and beyond.

Over the long term the commercial airplane industry is poised for growth owing to increased demand for air travel, particularly in emerging economies. Boeing projects a $4.5 trillion jetliner market over the next 20 years for 34,000 new commercial jets. The largest portion of this demand comprising of 12,030 aircraft is estimated to come from Asia-Pacific region including China and India, followed by 7,760 and 7,290 aircraft from Europe and North America respectively. ^[3] The commercial airplanes division of the company constitutes nearly 45% of the overall company value.

Defense spending cuts could impact earnings

Boeing is also the second largest defense contractor for the U.S. government after Lockheed Martin (NYSE:LMT). Revenues in its Defense, Space and Security business increased 7% y-o-y to $16.4 billion in the first-half of 2012. ^[2] This growth was driven by higher military aircraft deliveries.

Total contractual backlog for the division at the end of second quarter was $54.2 billion, nearly one-and-half times its estimated revenue for 2012. However, we anticipate this contractual backlog to come under pressure in the third quarter from the defense spending cuts. The U.S. Budget Controls Act of 2011 proposes $487 billion cut in defense spending over the next 10 years starting in fiscal year 2012. This is also likely to impact revenues for the division in the third quarter.

Cash contribution towards pension liabilities to impact margins

In addition, the historically low interest rates have drastically lowered returns on pension plan assets of Boeing. As a result, the company is forced to make up for the shortfall by cash contributions. It contributed $763 million in the first half of 2012 and expects to contribute an equivalent amount in the second half. ^[2] This will impact margins in the third quarter.

These pension contributions have significantly impacted Boeing’s full year earnings forecast. The company forecasts earnings in the range of $4.40-$4.60 per share for full year 2012 compared to earnings of $5.34 per share in 2011. ^[2] This difference of approximately $0.85 is attributable to cash contributions towards pension liabilities.

All in all, Boeing is expected to post good numbers in its third quarter earnings driven by commercial aircraft deliveries. However, this growth will be offset by pension contributions.

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1. Boeing to Release Third-Quarter Results on October 24, September 26 2012, www.boeing.com [↩]
2. 2012 Q2 10-Q, www.boeing.com [↩] [↩] [↩] [↩] [↩] [↩] [↩]
3. Long-term market airplane market developments, www.boeing.com [↩]