Earnings Preview: Commercial Airplane Deliveries to Lift Boeing’s Revenues and Profits

Boeing (NYSE:BA) will announce its first quarter earnings for 2015 on Wednesday, April 22nd. The airplane manufacturer is coming off a good performance through 2014, in which its revenue and profit rose on higher commercial airplane deliveries. In Q1 2015, we expect the company to post higher earnings as its commercial airplane deliveries continued to grow. Boeing delivered 184 commercial airplanes in Q1 2015, an impressive 14% rise in deliveries on a year-over-year basis. ^[1] Given that commercial aviation constitutes nearly 65% of Boeing’s top line, this significant growth in airplane deliveries will likely lift the first quarter earnings. However, weak U.S. military spending could temper this growth from commercial aviation.

For Q1 2015, average analyst estimate for earnings per share remains at $1.83. ^[2] At the end of Q4 2014, Boeing estimated earnings for Q1 2015 at 20% of full earnings. ^[3]

We currently have a price estimate of $156 for Boeing, approximately 4% above its current market price.

See our complete analysis of Boeing here

We Expect Higher Commercial Airplane Deliveries To Translate Into Higher Revenues

Boeing raised its 737 production rate to 42 airplanes per month after a hike in March 2014. The company delivered 121 of these jetliners in the first quarter, up from 115 in Q1 2014. Boeing also hiked its 787 production rate around the start of 2014 to 10 airplanes per month, up from 7 per month. The company delivered 30 787s to airlines in Q1 2015, up from 18 that it delivered in Q1 2014. Boeing did not make any deliveries of the 767 in Q1 2014. However, in Q1 2015, five 767s were delivered. ((Orders & Deliveries, Boeing))

Total commercial aviation backlog increased to 5,800 airplanes with record net orders of 1,432 airplanes at the end of Q4 2014. ^[4] In Q4 2014, Boeing also announced its intention to raise production rates of the 737 to 52 per month by 2018 in response to the increasing backlog. ^[5] This intended increase in production rates to 52 per month is a move to avoid long waiting periods on airplane deliveries as it could compel airlines to look at other manufacturers, especially Airbus. We figure higher airplane deliveries driven by these rate hikes will be the primary driver of growth in Boeing’s results over the next decade.

After a record net orders in 2014, Q1 2015 witnessed a slowdown in new orders moving from 275 in Q1 2014 to 116 in Q1 2015. However, the decrease comes due to a reduction in 737s ordered. This should not concern investors given the large backlog at Boeing, and the fact that orders for all other commercial airplanes except the 737 saw a year-over-year rise in Q1 2015. It is important to note that Boeing earns a higher margin on these wide-body air frames as compared to the narrow-body 737. ^[6]

We Anticipate Boeing’s Defense Revenues Could Temper Growth

On the flip side, lower U.S. military spending could temper growth in Boeing’s first quarter results. The company generates the majority of its defense contracting sales from the U.S. government. In 2014, due to lower U.S. military spending, Boeing’s defense sales fell by approximately 3%. Boeing’s fighter jet program continues to witness low orders and an uncertain future in the global fighter jets market due to intense competition from Lockheed Martin. No significant recovery is anticipated in the U.S. military spending this year, and we expect it to witness a growing trend from 2016.

In response to the slowdown in U.S. military spending, Boeing has been focusing on international markets for defense revenues. However, as of 2014, Boeing continued to derive over 85% of its revenues from the US, making it a major driver for the segment’s revenues.

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. So, like in the Q4 2014, 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. Orders & Deliveries, Boeing [↩]
2. BA Analyst Estimates, Yahoo!Finance [↩]
3. The Boeing’s (BA) CEO Jim McNerney on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha [↩]
4. The Boeing’s (BA) CEO Jim McNerney on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha [↩]
5. Boeing to Increase 737 Production Rate to 52 per Month in 2018, Boeing [↩]
6. Boeing Commercial Orders And Deliveries Q1 2015, Seeking Alpha [↩]