Boeing Earnings: 787 Groundings Will Cause Some Turbulence

April 22nd, 2013 by Trefis Team
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    Quick Take 

  • Boeing’s first quarter sales will be impacted by the temporary suspension on 787 deliveries as well as the additional costs incurred from designing and testing battery fixes will impact margins
  • Government austerity will weigh on Boeing’s defense segment results. The U.S. government constitutes over 80% of Boeing’s defense segment sales.
  • Slightly higher deliveries for the 737 and 777, driven by a rising order backlog will likely partially offset the negative impact from the 787 grounding and the U.S. defense spending cuts.

Boeing (NYSE:BA) will announce its first quarter earnings Wednesday, April 24. The aircraft manufacturer’s sales and profits will be hit by a freeze on 787 Dreamliner deliveries and lower U.S. defense spending. The negative impact from these will likely be partially offset by slightly higher deliveries of the narrow body 737s and the wide body 777s to airlines. In all, Boeing faces a tough quarter.

Though for full year 2013, we anticipate Boeing to post strong growth in its commercial aviation business driven by its huge order backlog and steady inflow of new airplane orders. The growth from commercial aviation will likely be partially mitigated by a decline in the defense business. Overall, in 2013, Boeing anticipates to generate revenues of $82-$85 billion, up from $81.7 billion in 2012, and earnings of $5-$5.20 per share, compared to $5.11 per share in 2012. [1]

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We currently have a stock price estimate of $82 for Boeing, approximately 5% below its current market price.

See our complete analysis of Boeing here

787 Groundings Will Weigh On First Quarter Results

In January, the Federal Aviation Administration (FAA) and the regulatory bodies for other countries ordered the grounding of 787s after a battery short-circuit started a fire in a parked 787 at Boston Airport, and smoke from a battery on another 787, forced an emergency landing in Japan. Soon thereafter, Boeing voluntarily suspended deliveries of 787s to airlines. Prior to this, it had delivered only one 787 in January. In comparison, it had delivered 23 787s in the fourth quarter of 2012. [2] This sharp decline in 787 deliveries in the first quarter will likely slash a significant portion of growth, which was anticipated in Boeing’s commercial aviation business.

Also, Boeing incurred additional costs associated with research and testing on 787 battery fixes, which will impact margins for the quarter. It will also likely have to pay significant delay compensations to the airlines, which have been impacted from this grounding. However, the worst seems to be over as the company received FAA’s approval on the new 787 battery systems last Friday, April 19. It is now introducing these new batteries and their related alterations in in-service 787s, which will be followed by a resumption of 787 deliveries to customers. For the full year 2013, we do not expect a significant impact from the 787 grounding on Boeing’s earnings.

Marginally Higher 737 and 777 Deliveries Will Help Growth

On the bright side, Boeing delivered three more 737s and four more 777s in the first quarter of 2013, compared to the previous year. [3] [4] These higher deliveries were a result of increased production rates under these programs. In recent years, Boeing has had to continuously ramp up production rates under many of its programs including 737, 777 and 787, due to the rising number of unfulfilled airplane orders driven by a strong inflow of new airplane orders. As of December 31, 2012, Boeing had unfulfilled orders for 4,373 airplanes, up from 3,771 airplanes at the end of 2011. [5] [6]

Overall, Boeing delivered 137 commercial airplanes in the first quarter of 2013, the same number it delivered in the first quarter of 2012. [3]

Boeing’s Defense Segment Faces Headwinds From Lower U.S. Defense Spending

Boeing’s defense business, which constituted 40% of its total sales in 2012, will likely post lower revenues in the first quarter due to the declining U.S. defense spending. The U.S. government constituted 83% of Boeing’s total defense sales in 2012, thus the impact from budget cuts is expected to be severe. [7]

Currently, defense spending of the U.S. government is expected to be slashed by $487 billion over a 10-year-period starting from the government fiscal year 2012, according to the Budget Controls Act of 2011. [8] Additionally, if sequestrations (the across-the-board government spending cuts which kicked in from March 1) persist, then defense spending could decline by an additional $500 billion over the coming decade. [9]

For full year 2013, Boeing anticipates its defense segment revenues to decline by around 3%-6%, compared to 2012. [1]

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Notes:
  1. Q4 and 2012 earning results – Form 8-K, January 30 2013, www.boeing.com [↩] [↩]
  2. Boeing Q4 2012 deliveries, January 3 2013, www.boeing.com [↩]
  3. Boeing’s Q1 2013 deliveries, April 4 2013, www.boeing.com [↩] [↩]
  4. Boeing’s Q1 2012 deliveries, April 5 2012, www.boeing.com [↩]
  5. Boeing completes 2012 with record-setting performance, January 3 2013, www.boeing.com [↩]
  6. Boeing wraps up 2011 with record breaking order announcement, January 5 2012, www.boeing.com [↩]
  7. Boeing’s 2012 10-K, February 11 2013, www.boeing.com [↩]
  8. Lockheed’s 2012 10-K, February 28 2013, www.lockheedmartin.com [↩]
  9. CNN explains sequestrations, February 19 2013, www.cnn.com [↩]