Higher Commercial Airplane Deliveries Will Likely Lift Boeing’s Results Despite Weak U.S. Defense Spending

Boeing (NYSE:BA) will announce its second quarter earnings Wednesday, July 23. The airplane manufacturer will likely post healthy growth in its revenues and profits on higher commercial airplane deliveries to airlines. Earlier in July, Boeing announced that it had delivered 181 commercial airplanes to airlines in the second quarter, up from 169 it delivered in the same period last year. ^{[1] [2]} We figure this increase in Boeing’s airplane deliveries will drive growth in its commercial airplane segment, which constitutes over 60% of its top line.

On the flip side, the flat-to-declining U.S. defense spending will likely impact second quarter results at Boeing’s defense segment, which constitutes the majority of its remaining 40% top line. Even in the last quarter, Boeing’s defense segment revenues fell by 6% annually due to lower defense spending from the government that funds the bulk of the company’s defense business. For full year 2014, Boeing anticipates its defense segment revenues to fall by 7-10% annually to $30-31 billion. ^[3] Thus, we figure in the second quarter, the company will likely see lower year-over-year defense segment revenues. However, this decline from the defense segment, will likely be more than offset by growth from the company’s commercial airplane segment, in the second quarter.

We currently have a stock price estimate of $142 for Boeing, around 10% ahead of its current market price.

See our complete analysis of Boeing here

Hike In 737 and 787 Production Rates Drove Boeing’s Airplane Deliveries Higher

Boeing delivered 12 more commercial airplanes to airlines in the second quarter, compared with the year ago period. This increase in the company’s airplane deliveries is the result of higher production rates across two of its highest selling airplane models – the 737 and 787 Dreamliner.

In March earlier this year, Boeing hiked its 737 production rate to 42 airplanes per month, from 38 airplanes per month. As a result, the company delivered 124 737s to airlines in the second quarter, up from 116 it delivered in the second quarter of last year. Similarly, at its 787 program, around the end of last year, Boeing hiked the production rate to 10 airplanes per month, from 7 airplanes per month. As a result, the company delivered 30 787s to airlines in the second  quarter, compared with 16 in the same period last year. ^{[1] [2]}

The reason why Boeing raised the production rates of its highest selling models is pretty clear. The airplane maker through higher production rates for 737 and 787 is trying to cope with the surging orders for these airplanes. Steady growth in global airline passenger traffic over the last 4-5 years has pushed airlines across the world to add new airplanes to their fleets. At the same time, airline profits have grown significantly in recent years, providing them with the financial strength required to order new airplanes. While airlines in the developed regions have placed orders primarily to replace older airplanes in their fleets. Airlines in the developing regions of the world have placed orders for new airplanes primarily to add flying capacity to their fleets. In effect, this sudden surge of orders from airlines has ballooned backlogs at airplane makers such as Boeing and Airbus. Boeing’s backlog for instance has increased from 3,771 airplanes at the start of 2012, to 5,237 airplanes at the end of June 2014. ^{[4] [5]} In turn, this growth in its backlog has prompted Boeing to hike the production rates of its highest selling models. However still, even at the current hiked production rates, it will take Boeing about seven years to clear its backlog. Thus, if an airline places order for an airplane today, it will have to wait many years before it can take the airplane’s delivery. Airlines on their part, do take this waiting period in to account while placing orders, but an extended waiting period can impact Boeing’s sales. This is why the company plans to raise its 737 production rate further to about 47 airplanes per month over the next few years. In effect, Boeing will likely continue to deliver an increasing number of airplanes to airlines in the coming years. In our opinion, this will help the company maintain its share of the global commercial airplane deliveries.

In the second quarter, these higher airplane deliveries driven by recent production rate hikes for the 737 and 787 airplanes, will drive growth in Boeing’s results.

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1. Boeing reports Q2 2014 deliveries, July 3 2014, www.boeing.com [↩] [↩]
2. Boeing reports Q2 2013 deliveries, July 3 2013, www.boeing.com [↩] [↩]
3. Boeing’s 2014 Q1 earnings form 8-K, April 23 2014, www.boeing.com [↩]
4. Boeing’s unfilled orders, July 18 2014, www.boeing.com [↩]
5. Boeing’s orders & deliveries at the end of 2011, January 5 2012, www.boeing.com [↩]