Boeing Is Well Positioned To Grow Through The End Of This Decade

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BA: The Boeing Company logo
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The Boeing Company

Boeing (NYSE:BA) has grown at an impressive pace since the start of this decade. The company entered this decade with annual revenue of about $64 billion, and it posted annual revenue of nearly $91 billion last year. The company’s annual profit has also increased from $3.3 billion to $5.4 billion over this period. [1] Higher production rates driven by rising airplane orders from airlines have been the primary driver of this growth in Boeing’s results. Looking ahead, we figure Boeing will continue to grow through the end of this decade, as it plans to execute five more production rate hikes over the next five years. In the current year, Boeing forecasts its top line to rise to $94.5-96.5 billion, from about $91 billion in 2014, on higher commercial airplane deliveries. [2]

We currently have a price estimate of $156 for Boeing, approximately in line with its current market price.

See our complete analysis of Boeing here

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Commercial Airplane Demand To Lead To Production Rate Hikes

Boeing is one of the two major manufacturers of 100+ seat aircraft for the global commercial airplane industry. The other major airplane maker in this category is Airbus. There is intense competition between these two players for market share, though solid growth in commercial airplane demand over the last few years has enabled both companies to grow their results. Looking ahead, this strong demand for new commercial airplanes should persist as airline profits are rising and demand for air travel is growing. Global airline profits are expected to touch nearly $20 billion in 2014, up from $11 billion in 2013, and in our view, airline profits will continue to rise in 2015 due to lower crude oil prices. [1] Historically, airlines have placed more orders for new airplanes when their profits rise. So, the rising airline profits in the current environment will bring more orders for Boeing in 2015, boosting its backlog.

To put the anticipated rise in Boeing’s backlog in perspective, the company already has nearly 5,800 commercial airplanes in its backlog. [3] At current production rates, it will take Boeing over seven years to clear its existing backlog. Thus, a further rise in backlog will compel Boeing to raise production rates. The company plans to hike its 737 production rate from 42 per month currently, to 47 per month in 2017 and eventually to 52 per month in 2018. Boeing also plans to raise its 787 production rate from 10 per month currently to 12 and 14 per month in future years. Together the 737 and 787 airplanes constitute more than 80% of all Boeing commercial airplane deliveries, so these planned 737 and 787 rate hikes will drive significant growth in Boeing’s results in coming years.

That said, Boeing will also face greater competition from other airplane makers in coming years. After reaching parity with Boeing in the single-aisle airplane segment, Airbus has launched the A330neo and A350 to give Boeing greater competition in the wide-body airplane segment. Regional jet makers Embraer and Bombardier, which up until now focused on producing commercial jets that have a seating capacity of less than 100 passengers, are now developing larger jets to compete with Boeing and Airbus in the single-aisle airplane segment. New entrants – China’s Comac, Russian Irkut, and Mitsubishi’s Regional Jet – will also add to competition in the global commercial airplane industry in coming years.

Despite this growing competition, we figure Boeing is well positioned to retain its market share. The company’s 737MAX will allow it to maintain its position in the single-aisle airplane segment. Recent successful launches of the 777X and 787-10 will also allow Boeing to maintain its lead over Airbus in the wide-body airplane segment. So, in our view, Boeing should be able to maintain its market share through the end of this decade.

At the same time, driven by production rate hikes at both Boeing and Airbus, global commercial airplane deliveries should rise through the end of this decade.

U.S. Defense Spending Could Recover From 2016 Onward

In contrast, growth prospects in Boeing’s other major business – defense contracting – are relatively dim. This business constitutes about 30% of Boeing’s top line, with the remainder coming from its commercial aviation business.

Boeing’s defense sales have steadily fallen for the past 3 years due to declining defense spending by the U.S. government. However, the President’s proposed defense budget for fiscal 2016 has raised expectations that contract volumes for major defense contractors could recover beginning in 2016. Boeing is the second largest defense contractor for the U.S. government after Lockheed (NYSE:LMT).

Additionally, the fiscal 2015 budget, which was signed into law in December, fully funds core Boeing defense programs such as the Apache helicopter and the P-8A Poseidon. Accordingly, Boeing has forecast only a slight decline in its 2015 defense sales, from $30.8 billion in 2014 to about $30 billion in 2015. [2] Boeing’s key defense programs that are under development such as the KC-46A Tanker and Long-Range Strike also remain fully funded. This funded status of Boeing’s major programs and the anticipated recovery in U.S. defense spending give us confidence that Boeing’s defense business will not completely offset growth from its commercial aviation business even in the worst case scenario.

Separately, driven by rising international defense spending, especially from the Middle East and Asia, Boeing’s international defense sales could grow in coming years, reducing its dependence on the U.S. government. In 2014, international customers constituted 28% of Boeing’s defense revenue, but they represented 36% of its backlog. [4] So, clearly Boeing’s defense sales mix will grow in favor of international customers in coming years. Additionally, Boeing has said that it will cut $2 billion in costs from its defense business, which will also boost its profits.

All in all, solid growth from commercial aviation and bottoming out of U.S. defense spending will likely enable Boeing to grow its results through the end of this decade.

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Notes:
  1. Boeing’s 2014 10-K, Feb 12 2015, www.boeing.com [] []
  2. Boeing’s 2014 Q4 earnings form 8-K, January 28 2015, www.boeing.com [] []
  3. Boeing’s unfilled  commercial airplane orders, Feb 23 2015, www.boeing.com []
  4. Boeing’s 2014 Q4 earnings transcript, Jan 28 2015, www.seekingalpha.com []