Boeing’s Earnings Will Take Off On Higher Commercial Airplane Deliveries Driven By Production Ramp Ups

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The Boeing Company

Boeing (NYSE:BA) will announce its first quarter earnings Wednesday, April 23. The airplane manufacturer will likely post strong growth in its revenues and profits on higher commercial airplane deliveries. Earlier this month, Boeing reported that it had delivered 161 commercial airplanes to airlines in the first quarter, up from 137 in the prior year period. [1] [2] We figure this increase in Boeing’s airplane deliveries will drive strong growth at its commercial airplane segment, which constituted 61% of its overall revenues last year.

Additionally, an improved defense funding environment in the U.S. will likely support first quarter results at Boeing’s defense segment, which constitutes the majority of its remaining business. Earlier this year, the U.S. government in its budget for fiscal 2014 eliminated across-the-board spending cuts, called sequestrations. Instead, it increased limits on discretionary spending in line with the Bipartisan Budget Act, which was passed in December last year. This act provides for additional defense funding of approximately $22 billion and $9 billion for fiscals 2014 and 2015, respectively. [3] We figure this additional funding along with greater flexibility for government agencies in allocating these funds will aid Boeing’s defense segment results in the first quarter and the remaining months of 2014.

Overall, in our view, Boeing will likely post a strong first quarter. We currently have a stock price estimate of $135 for Boeing, around 5% ahead of its current market price.

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Higher Production Rates Will Lift Boeing’s First Quarter Results

Boeing delivered 24 more commercial airplanes in the first quarter, compared to the year ago period. This increase in the company’s airplane deliveries is a result of higher production rates across two of its highest selling airplane models – the 737 and 787 Dreamliner.

In the first half of last year, driven by growing order backlog, Boeing hiked its 737 production rate to 38 airplanes per month from 35 per month. Thereafter, in March earlier this year, the company again hiked its 737 production rate to 42 airplanes per month. As a result, it delivered 115 737s to airlines in the first quarter, up from 102 in the first quarter of 2013. [1] [2]

Similarly, at its 787 program, in May last year, Boeing hiked its production rate to 7 airplanes per month from 5 per month. Thereafter, by the end of 2013, the company further hiked its 787 production rate to 10 airplanes per month. As a result, the company delivered 18 787s to airlines in the first quarter, compared to 1 in the same period last year. Its important to note here that in the first quarter of last year, Boeing had suspended its 787 Dreamliner deliveries due to battery issues. Thus, this year-over-year jump in 787 Dreamliner deliveries is attributable to not only production rate hikes but also suspension of their deliveries during the first quarter of last year.

The reason why Boeing is raising its production rates is pretty clear. The airplane maker through higher production rates is trying to cope with surging orders from airlines worldwide. Airlines from the developed regions are placing orders for new airplanes to replace their aging fleets. While, airlines from the developing world are placing orders to add flying capacity to their fleets. In turn, these strong order inflows are growing backlog at Boeing prompting it to hike its production rates. For instance, over the past couple of years, strong order inflows for new airplanes has increased Boeing’s backlog to 5,154 airplanes through March 2014, from 3,771 airplanes at the end of 2011. [4] [5]

All in all, in the first quarter, higher commercial airplane deliveries driven by production ramp ups will likely grow Boeing’s results. Additionally, for full year 2014, Boeing anticipates to deliver 715-725 commercial airplanes to airlines, up from 648 in 2013. We figure this growth in the company’s full year commercial airplane deliveries will grow its share of the global commercial airplane market.

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Notes:
  1. Boeing reports 2014 Q1 deliveries, April 3 2014, www.boeing.com [] []
  2. Boeing reports 2013 Q1 deliveries, April 4 2014, www.boeing.com [] []
  3. Lockheed’s 2013 10-K, February 14 2014, www.lockheedmartin.com []
  4. Boeing’s unfilled orders, April 21 2014, www.boeing.com []
  5. Boeing’s 2013 Q4 earnings form 8-K, January 30 2014, www.boeing.com []