Boeing’s Earnings Will Glide Higher On Commercial Airplane Deliveries

Boeing (NYSE:BA) will announce second quarter earnings on July 24. The aircraft manufacturer will likely post strong growth in sales and profits on higher commercial airplane deliveries, partially offset by fewer military aircraft and equipment deliveries.

Earlier in the month, Boeing announced its highest quarterly commercial airplane deliveries in fifteen years as it raised production rates to make timely deliveries against its growing order book. Deliveries were driven by production rate hikes of narrow body 737s and resumption of 787 Dreamliner deliveries following the Federal Aviation Administration’s (FAA) approval of the plane’s battery modifications. (See With Battery Concerns Resolved 787s Will Begin To Haul In Growth For Boeing)

Boeing currently anticipates its full year 2013 sales to lie between $82 billion and $85 billion, up from $81.7 billion in 2012, and its 2013 earnings to lie between $5 per share and $5.20 per share, compared to $5.11 per share in 2012. ^[1] In the first quarter, even though revenues of the company declined by 3% year-over-year to $18.9 billion due to suspension of 787 deliveries, earnings increased by 18% y-o-y to $1.44 per share on higher deliveries of 737 and 777. ^[2]

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Growth From Commercial Aviation

Rising demand for air travel from the emerging markets and replacement (of older aircraft) demand from the developed markets has forced airlines across the world to place orders for new airplanes. This has increased order backlogs at most aircraft manufacturers, including Boeing. In response, Boeing has increased production rates of its highest selling models, which include the single-aisle 737 and twin-aisle 777 and 787.

In the first quarter, Boeing increased the production rate of its 737s to 38 airplanes per month from 35 per month, and of its 777s to 8.3 airplanes per month from seven per month. Thereafter, in May the company rolled out its first 787 at an increased production rate of seven airplanes per month, up from five per month. These production rate hikes across the three highest selling models of Boeing increased the company’s second quarter deliveries by 13% year-over-year to 169 airplanes. ^[3]

However, in spite of these production increases the undelivered backlog of the company increased to 4,757 commercial airplanes through June 2013, from 4,373 at the beginning of 2013. ^{[4] [5]}

In the second quarter, this growth from commercial aviation will grow the company’s sales and earnings significantly, as Boeing generates around 60% of its total sales from its commercial airplane segment.

Government Austerity Could Weigh On Earnings

On the flip side, the remaining 40% of Boeing’s sales, which are generated from military aircraft and equipment, will likely face pressure in the second quarter from declining government spending. Across-the-board government spending cuts called sequestration, which came in effect from March 1, will lower government’s defense spending by $42.7 billion in fiscal 2013, which ends on September 30. ^[2]

Boeing will be impacted significantly from these cuts as it receives over 80% of its defense sales from the U.S. government. The impact from this spending cut was also evident from the decline in the company’s second quarter military aircraft and satellite deliveries reported in early July.

Also, in focus this earnings will be the backlog at the end of the second quarter at Boeing’s defense segment, as at the end of the first quarter, the company’s military backlog (contractual) had declined by 8% to $51.6 billion, from $55 billion at the end 2012. ^[2]

On the bright side, during the second quarter, Boeing transferred the first C-17 – a military transport aircraft – to the Indian Air Force. The company will deliver four more C-17s to India in 2013 and another five in 2014, in a deal valued at over $2 billion at list prices. ^{[6] [7]} Even though international defense sales constitute less than 20% of Boeing’s total military sales, such deals will help the company offset the impact from lower government defense spending at home.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Boeing reports strong first quarter performance, April 24 2013, www.boeing.com [↩]
2. Boeing’s 2013 first quarter 10-Q, April 24 2013, www.boeing.com [↩] [↩] [↩]
3. Boeing reports 2013 Q2 deliveries, July 3 2013, www.boeing.com [↩]
4. Boeing’s unfilled orders through June 2013, July 17 2013, www.boeing.com [↩]
5. Boeing completes 2012 with record-setting performance, January 3 2013, www.boeing.com [↩]
6. Boeing transfers first C-17 to Indian Air Force, June 11 2013, www.boeing.com [↩]
7. C-17’s list price at C-17-wikipedia, July 18 2013, www.wikipedia.org [↩]