Higher 737 and 787 Production Rates Will Likely Lift Boeing’s Profit Despite Lower Government Military Spending

Boeing (NYSE:BA) will announce its third quarter earnings Wednesday, October 22. The airplane manufacturer is coming off a good second quarter in which its profit rose sharply on higher commercial airplane deliveries. We figure the company will likely continue to post healthy growth in its profit in the third quarter as it delivered more commercial airplanes to airlines, compared with the same period last year. Boeing delivered 186 commercial airplanes in the three months ended September 30, 2014, up from 170 airplanes that it delivered in the year ago period. ^{[1] [2]} Given that the commercial aviation business constitutes nearly 65% of the company’s top line, this significant growth in commercial airplane deliveries will likely lift its third quarter results. Having said this, a weakness from lower U.S. military spending will likely weigh on the remaining portion of Boeing’s business, consisting of primarily defense equipment manufacturing.

We currently have a stock price estimate of $136 for Boeing, around 10% ahead of its current market price.

See our complete analysis of Boeing here

Higher Production Rates Of 737 and 787 Dreamliner Will Drive Q3 Results

Boeing raised the production rate of its best selling narrow-body airplane, the 737 Next Generation, from 38 airplanes a month to 42 a month in March earlier this year. As a result, the company delivered 120 of these jetliners in the third quarter, up from 112 in the third quarter of 2013. Boeing also benefited from a production rate hike executed in its wide-body 787 Dreamliner program in December last year. The company at the time hiked its 787 production rate to 10 airplanes a month from 7 a month. As a result, Boeing delivered 31 787s to airlines in the September quarter of this year, compared with 23 787 deliveries in the same period last year. Higher deliveries for these two highest selling Boeing airplanes accounted for the entire increase in Boeing’s total commercial airplane deliveries in the third quarter.

In our view, the company executed these rate hikes as backlogs for both these airplanes rose sharply over the past few years. With global air passenger traffic recovering strongly in the aftermath of the financial crisis, airlines from around the world placed large orders for these jetliners. Through September 2014, Boeing’s backlog for the 737 swelled over 4,000 airplanes and backlog for the 787 Dreamliner increased to about 860 airplanes. At current production rates, the company will take approximately 7-8 years to clear off this backlog. The issue with this long time period is that airlines will have to wait many years before taking delivery against their orders. This long waiting time period could compel a few airlines to look towards other manufacturers, especially Airbus. So, in order to prevent airlines from looking towards other manufacturers just because of a long waiting time period, Boeing executed production rate hikes in its 737 and 787 programs. In the third quarter, we figure higher airplane deliveries driven by these rate hikes will be the primary growth driver in Boeing’s results.

Weak U.S. Defense Spending Will Likely Temper Growth From Commercial Aviation

On the flip side, flat-to-declining military spending from the U.S. government will likely weigh on Boeing’s defense contracting business, which constitutes the majority of its remaining 35% top line. Boeing generates nearly 70% of its defense business from U.S. government contracts, so weak government spending will weigh on the company’s defense business. In the first half of 2014, due to government austerity, Boeing’s defense sales fell by 6% annually, and we anticipate this trend to persist in the third quarter. For full year 2014, Boeing anticipates its defense segment sales to fall by 7-10% annually to $30-31 billion. ^[3] But, given the solid growth in the company’s larger commercial airplane segment, we figure the company will likely be able to more than offset this weakness in its defense business to post good third quarter results.

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1. Boeing’s 2014 Q3 deliveries, October 3 2014, www.boeing.com [↩]
2. Boeing’s 2013 Q3 deliveries, October 3 2013, www.boeing.com [↩]
3. Boeing’s 2014 Q2 earnings form 8-K, July 23 2014, www.boeing.com [↩]