Boeing’s Net Rises On Higher Commercial Airplane Deliveries & One-Time Gains

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The Boeing Company

Boeing (NYSE:BA) reported strong growth in its second quarter results on higher commercial airplane deliveries and favorable tax items, partially offset by a charge related to the KC-46 aerial refueling tanker program. The airplane maker’s revenues rose by 1% annually to $22 billion, and its earnings rose by 59% annually to $2.24 per share, in the second quarter. The sharp growth in the company’s second quarter earnings was aided by $524 million in favorable tax items resulting in part from tax settlement from previous financial years. [1]

Separately, earlier in July, Boeing announced that it delivered 181 commercial airplanes to airlines during the second quarter, up from 169 airplanes that it delivered to airlines in the same period of last year. These higher commercial airplane deliveries outweighed the decline in Boeing’s defense segment sales to lift its overall revenues. During the second quarter, the company also continued to see strong order inflows for new airplanes. This raised the company’s backlog to $426 billion, comprising of over 5,200 airplanes. [1] At current production rates, it will take Boeing over seven years to clear this backlog.

We currently have a stock price estimate of $142 for Boeing, about 15% ahead of its current market price. We are in the process of incorporating the second quarter results, and shall update our analysis shortly.

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Hike In 737 and 787 Production Rates Drove Growth In Boeing’s Results

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

Boeing undertook these production rate hikes in order 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, rising airline profits have provided airlines with the financial muscle needed to order new airplanes. Consequently, airlines from both developed and developing regions of the world have placed large orders for new airplanes. This sudden surge of orders from airlines has grown 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 over 5,200 airplanes at the end of June 2014. [2] [3] In turn, this growth in its backlog has prompted Boeing to hike the production rates of its highest selling models. And, higher deliveries resulting from these increased production rates grew Boeing’s commercial airplane segment revenues by 5% annually to $14.3 billion in the second quarter. [1]

Looking ahead, the company plans to further hike its 737 production rate to 47 airplanes per month by 2017. We figure this increase will enable Boeing to continue to grow its deliveries and its commercial airplane segment results over the coming years.

Weak U.S. Defense Spending Impacted Boeing’s Defense Segment Results

On the flip side, sales growth in the second quarter from Boeing’s commercial airplane segment was partially offset by a 5% sales decline from its defense segment. [1] Boeing’s defense revenues are falling due to lower defense spending from the U.S. government, which constitutes about 70% of the company’s total defense business. However, international orders now constitute close to 35% of this segment’s backlog. [4] So, we figure Boeing’s dependence on the U.S. government will likely gradually decline in the coming years. For the full year 2014, Boeing anticipates its defense segment revenues to fall by 7-10% annually to $30-31 billion.

Unforeseen Charges In The Development Of Aerial Tanker Impacted Profits

Separately, we were surprised to see a $272 million after-tax charge related to the KC-46 tanker program in the second quarter. [1] In the absence of this charge, Boeing’s second quarter earnings would have grown at an even higher rate. The company on its part said that it incurred this charge due to some wiring rework on the aerial tanker. We figure if Boeing faces such unforeseen charges again, then its profits from this program will get impacted. Boeing won the contract to build 179 aerial refueling tankers in 2011 from the U.S. government in a deal worth about $41 billion. [5] [6] The company is modifying its 767 airplane’s design to build this refueling tanker. The development work for this jet has proceeded smoothly up till now, but budget overruns due to such charges in future will impact Boeing’s profits.

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Notes:
  1. Boeing’s 2014 Q2 earnings form 8-K, July 23 2014, www.boeing.com [] [] [] [] []
  2. Boeing’s unfilled orders, July 18 2014, www.boeing.com []
  3. Boeing’s orders & deliveries at the end of 2011, January 5 2012, www.boeing.com []
  4. Boeing’s 2014 Q2 earnings transcript, July 23 2014, www.seekingalpha.com []
  5. Boeing Receives US Air Force Contract to Build Next-Generation Refueling Tanker, February 24 2011, www.boeing.com []
  6. Boeing’s profits rise, but so do concerns, July 23 2014, online.wsj.com []