Commercial Airplane Deliveries Should Lift Boeing Despite Weak U.S. Military Spending

Boeing (NYSE:BA) will announce its fourth quarter and full year 2014 results on Wednesday, January 28. The airplane manufacturer is coming off a good performance in the first three quarters of 2014 in which its revenue and profit rose on higher commercial airplane deliveries. In the fourth quarter, we expect that the company will be able to post higher earnings as its commercial airplane deliveries continued to grow. Boeing delivered 195 commercial airplanes in the fourth quarter, up from 172 airplanes that it delivered in the year ago period. ^{[1] [2]} Given that commercial aviation constitutes nearly 65% of Boeing’s top line, this significant growth in airplane deliveries will likely lift the company’s fourth quarter earnings. However, weak U.S. military spending could temper this growth from commercial aviation in the company’s fourth quarter results.

For full year 2014, Boeing expects to post a revenue of $87.5-90.5 billion, up from $86.6 billion in 2013, and earnings of $8.10-8.30 per share, up from $7.07 per share in 2013. ^[3] Based on the company’s results in the first three quarters and growth in its airplane deliveries in the fourth quarter, we figure that Boeing will meet these revenue and earnings estimate.

We currently have a price estimate of $136 for Boeing, marginally above its current market price.

See our complete analysis of Boeing here

Production Rate Hikes Lifted Fourth Quarter Deliveries

Boeing raised its 737 production rate to 42 airplanes per month in March 2014, from the previous levels of 38 airplanes per month. As a result, the company delivered 126 of these jetliners in the fourth quarter, up from 112 in the fourth quarter of 2013. Boeing also hiked its 787 production rate around the start of 2014 to 10 airplanes per month, up from 7 per month. As a result of this rate hike, the company delivered 35 787s to airlines in the fourth quarter, up from 25 that it delivered in the fourth quarter of 2013. ^{[1] [2]} Higher deliveries of these two airplanes raised Boeing’s overall airplane deliveries in the fourth quarter.

Boeing likely executed these rate hikes as the backlog for both these airplanes has risen sharply over the past few years. With global air passenger traffic recovering strongly in the aftermath of the financial crisis of 2009, airlines around the world have placed large orders for these jetliners. Through 2014, Boeing’s backlog for the 737 has swelled to nearly 4,300 airplanes and backlog for the 787 Dreamliner has risen to about 840 airplanes. ^[4] At current production rates, the company will take approximately 6-7 years to clear off this backlog. The issue with this long time period is that airlines will have to wait years before taking delivery of their orders. This long waiting period could compel a few airlines to look to other manufacturers, especially Airbus. So, to prevent airlines from shifting to a competitor because of a long wait time, Boeing executed these production rate hikes in its 737 and 787 programs. In the fourth quarter, we figure higher airplane deliveries driven by these rate hikes will be the primary driver of growth in Boeing’s results.

Flat-To-Declining U.S. Military Spending Could Temper Growth

On the flip side, lower U.S. military spending could temper growth in Boeing’s fourth quarter results. The company generates the majority of its defense contracting sales from the U.S. government. In the first three quarters of 2014, due to lower U.S. military spending, Boeing’s defense sales fell by 4% annually. ^[3] We expect this trend to persist in the fourth quarter.

To temper the impact on profit from declining defense sales, Boeing is slashing operating costs at its defense segment through various measures, which include headcount reductions. Gains from these cost cutbacks were evident in the last quarter’s results, as the defense segment’s profit rose despite lower revenue. At its last earnings release, Boeing said that it plans to reduce operating costs at its defense segment by about $2 billion. ^[5] So, like in the third quarter, profit from Boeing’s defense segment could rise in the fourth quarter despite lower sales. In any case, strong profit growth from the commercial aviation segment should be sufficient to lift the company’s overall earnings.

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1. Boeing’s 2014 Q4 airplane deliveries, January 6 2015, www.boeing.com [↩] [↩]
2. Boeing’s 2013 Q4 airplane deliveries, January 6 2015, www.boeing.com [↩] [↩]
3. Boeing’s 2014 Q3 earnings form 8-K, October 29 2014, www.boeing.com [↩] [↩]
4. Boeing’s commercial airplane backlog, January 22 2015, www.boeing.com [↩]
5. Boeing’s 2014 Q3 earnings transcript, October 22 2014, www.seekingalpha.com [↩]