Boeing‘s (NYSE:BA) commercial airplane business had a phenomenal 2012. The company received 1,203 net orders – the second-highest in its history for a single year and, in order to make timely deliveries for the surging number of orders, the company raised its production rates to deliver 601 commercial airplanes in 2012, up from 477 in 2011.   However, despite the rise in production rates, the backlog rose to 4,373 commercial airplanes at the end of 2012 – the highest ever in Boeing’s history. 
This record level of unfilled commercial airplane orders will force the company to continue to raise its production rates, thereby making more deliveries in the near term. This will drive growth in its revenues and earnings in 2013. Boeing’s commercial airplane business constitutes 52% of the total company value, according our analysis. This growth in the commercial airplane segment will also help offset the impact of sequestrations on Boeing’s defense business, which constitutes 43% of the total company value by our estimates.
We currently have a stock price estimate of $75.16 for Boeing, in-line with its current market price.
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Growth in commercial orders driven by 737MAX
Out of 1,203 net commercial orders that Boeing received in 2012, 914 were for 737MAX.  This new engine variant of the Boeing 737 promises 13% fuel savings compared to its previous version. As such, airlines that are reeling under rising fuel costs have lined up to place orders for this model. With its strong performance in 2012, cumulative orders for the 737MAX rose to 1,064 at the end of 2012.  This model is currently under development and is scheduled to enter service in 2017.
Higher production and delivery rates will drive growth in the near-term
The high number of unfilled orders will force Boeing to maintain or raise production rates for its various models. The 787 Dreamliner program, which is running well behind its original delivery schedule, had unfilled orders for 799 airplanes as of December 31, 2012. The production rate for the 787 is around 5 planes per month at present, but Boeing plans to increase this to 10 planes per month by the end of 2013.
The high number of unfilled orders for other models like Boeing 777 (a backlog of 365 planes) and Boeing 737NG (a backlog of 2,010 planes) will cause the company to maintain their current production rates.  At present, approximately 35 Boeing 737NGs are being produced per month.
By the first-half of 2014, Boeing plans to produce 30% more airplanes compared to the first-half of 2012.  As such, the rising production rates will lead to a greater number of deliveries and drive growth in Boeing’s revenues and earnings.
Growth in commercial airplane business to help offset the decline in defense business
This growth in Boeing’s commercial airplane business will also help it offset the impact of declining U.S. defense spending on its defense business. At present the defense spending in the U.S. is expected to decline by $487 billion over a 10-year period starting from government fiscal year 2012. In 2011, Boeing generated $25.4 billion or 37% of its total revenues from the U.S. government’s defense programs.  However, the extent of the impact from declining U.S. defense spending on Boeing is unclear as the specific programs that will face cuts have not been announced yet.Notes:
- Boeing completes 2012 with record-setting performance, January 3 2013, www.boeing.com [↩] [↩] [↩] [↩] [↩] [↩]
- Boeing’s performance in 2011, January 5 2012, www.boeing.com [↩] [↩]
- Boeing commercial airplanes CEO focused on production rate increases, July 9 2012, www.boeing.com [↩]
- 2011 10-K, February 9 2012, www.boeing.com [↩]