Higher Commercial Airplane Deliveries Lift Boeing’s Net Despite Weaker Military Sales

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The Boeing Company

Boeing (NYSE:BA) posted another strong quarter as higher commercial airplane deliveries driven by production ramp ups more than offset the weakness from lower U.S. military spending. The airplane manufacturer’s first quarter revenues rose by 8% annually to $20.5 billion and its first quarter core earnings, which exclude special and one-time items, rose by 2% annually to $1.76 per share. However, the company’s GAAP earnings fell by 11% annually to $1.28 per share due to a previously announced pension charge of $334 million related to the company’s plan of transferring nearly 80% of its workforce to 401(k) defined contribution pension plans from conventional pension plans. [1]

Boeing also reaffirmed its guidance for full year 2014, which forecasts annual revenue growth between 1% and 5%, and annual GAAP earnings growth between 2% and 6%. [1] We currently have a stock price estimate of $135 for Boeing, around 5% ahead of its current market price. We are in the process of incorporating first quarter results and shall update our analysis shortly.

See our complete analysis of Boeing here

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Huge Backlog Is Prompting Boeing To Lift Its Production Rates & Deliveries

In the first quarter, Boeing delivered 161 commercial airplanes to airlines, up from 131 it delivered in the same period last year. [2] [3] This significant jump in deliveries was driven by production rate hikes across the company’s two most popular models – the narrow body 737 and the wide body 787 Dreamliner.

Boeing first increased its 737 production rate in the first quarter of last year to 38 airplanes per month, from 35 per month. Thereafter, in March this year, the company achieved a production rate of 42 airplanes per month in its 737 program. And, during the earnings presentation, the company reiterated that it will further increase its 737 production rate to 47 airplanes per month by 2017. Similarly, at its 787 program, Boeing reached a production rate of 10 airplanes per month during the quarter, compared to a production rate of around five airplanes per month in the first quarter of last year. These higher production rates were the primary drivers of growth in Boeing’s deliveries and first quarter results.

We figure the company raised its production rates in order to make timely deliveries against its huge backlog, which is equivalent to around seven years of its production at current rates. Additionally, despite these production ramp ups, Boeing’s backlog grew during the first quarter as new orders exceeded deliveries. During the quarter, the company received orders for 235 airplanes while it delivered 161 airplanes. [1] This goes to show that there is sustained global demand for Boeing’s fuel efficient airplanes. In our opinion, airlines are placing orders for new fuel efficient airplanes such as the 787 Dreamliner, 737MAX and 777X, as they are continuing to battle with persistently high jet fuel prices. Boeing also forecasts that its backlog will grow through 2014 as it expects orders to continue to exceed deliveries.

Separately, Boeing’s first quarter 777 deliveries were the same as they were in the year ago period. Unlike its 737 and 787 programs where Boeing raised its production rates, we figure it could be challenged to just maintain the current 777 production rate of around 100 airplanes a year. The backlog for the 777 through March was 360 airplanes – roughly equal to around three-and-half years of production. [4] While Boeing plans to replace the current generation 777 – 777-300ER – with the 777X near the end of this decade. So, in order to maintain its 777 production rate, the company will have to generate more orders for the -300ER. One challenge that Boeing will face in doing so is that many potential customers of the 777-300ER will wait for the 777X, as the latter will be a more advanced and more fuel efficient airplane. Boeing realizes this and during the earnings presentation said that it may have to give significant discount on -300ER’s list price of $320 million to generate more orders for this airplane. At the same time, in order to maintain its margins under the program, the company is already undertaking aggressive cost cuts at its 777 production factory.

All in all, Boeing’s commercial airplane segment which constitutes over 60% of its revenues posted strong results in the first quarter.

Lower U.S. Military Spending Is Impacting Boeing’s Defense Sales

On the flip side, Boeing’s first quarter growth from commercial aviation was tempered by lower sales and profits from its defense segment, which is primarily dependent on U.S military spending. This segment’s revenues and profits fell by 6% annually to $7.6 billion in the first quarter. And, for full year 2014, Boeing forecasts its defense segment revenues to fall by around 7-10% annually to $30-31 billion. [1] The bright side of the situation is that international sales constituted around 30% of Boeing’s defense segment revenues in the first quarter and international defense orders constituted 35% of the segment’s backlog. [5] This means that in the coming years Boeing will have a higher share of international sales in its defense sales which will reduce its dependence on U.S. military spending. We figure this a reflection of the flat to declining U.S. military spending and growing international military spending especially from the Middle-East and Asia-Pacific regions.

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Notes:
  1. Boeing’s 2014 Q1 earnings form 8-K, April 23 2014, www.boeing.com [] [] [] []
  2. Boeing reports 2014 Q1 deliveries, April 3 2014, www.boeing.com []
  3. Boeing reports 2013 Q1 deliveries, April 4 2013, www.boeing.com []
  4. Boeing’s order backlog by model through March 2014, April 28 2014, www.boeing.com []
  5. Boeing’s 2014 Q1 earnings transcript, April 28 2014, www.boeing.com []