Record Commercial Airplane Deliveries Help Boeing Post Solid Q3 Results

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The Boeing Company

Boeing (NYSE:BA) recently announced its third quarter earnings, which grew 18% (core earnings) amid record commercial airplane deliveries. Overall, Boeing posted solid results with a double-digit top line growth in the commercial airplanes segment and we believe it will continue this trajectory in the coming years amid increased production rates. Looking at Q3, the company delivered 199 commercial airplanes, reflecting a 7% growth from the prior year quarter. While the domestic defense-related business continues to face headwinds, Boeing benefited from its international operations, boosting the segment top line. Given the solid performance, Boeing has revised its full year revenue guidance by $500 million and $0.25 in terms of earnings per share. [1]

Separately, the company in its conference call talked about the investor concerns over a bubble in wide body aircraft market and stated that the value of Boeing’s wide body 777 is holding up very well in the marketplace and it continues to see a healthy market for both, narrow as well as its wide body aircraft. [1] On that note, we discuss below the factors that can drive growth for Boeing in the coming years. We currently have a $131 price estimate for Boeing’s shares, which we will soon update to incorporate the recent quarterly earnings.

See our complete analysis of Boeing here

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Higher Airplane Deliveries Will Drive Future Growth

Boeing generates close to 70% of its overall revenues from commercial airplanes segment. The company has seen a consistent growth in commercial aircraft deliveries in the recent years. It delivered 723 airplanes in 2014, almost double of what it delivered in 2008. [2] This can be attributed to the company’s increased production rates to make deliveries against its huge order backlog (approximately $425 billion). Given the sheer size of the backlog, it will take more than 7 years for Boeing to fulfill the orders at current production rates, which, in turn, could reduce the inflow of new orders. That is why Boeing plans to raise its 787 production rate to 12 per month in 2016 and then to 14 per month by the end of this decade, from 10 per month in 2014. This hike in production rates points towards stronger cash flows, as Boeing receives a significant portion of its payment at the time of airplane delivery (see – Boeing Will Sustain Its Current Market Share In Commercial Airplane Deliveries).

Boeing’s commercial airplanes segment revenues have increased from a little under $32 billion in 2010 to around $60 billion in 2014 and we expect this figure to be around $75 billion towards the end of our forecast period (towards 2022), primarily due to increased production rates, which will help it sustain 45% market share in global commercial aircraft deliveries.

Defense Related Business In International Markets Will Help Offset Some Of The Declines Seen In Domestic Market

Boeing is facing pressure on defense orders and this weighed on the segment’s top line as well as bottom line during the first half of 2015. This can be attributed to Boeing’s fighter jet program, which continues to witness low orders and an uncertain future in the global fighter jets market due to intense competition from Lockheed Martin. In response to the slowdown in the U.S. defense orders, Boeing has been focusing on international markets for growth. Boeing said that it expects to sell 150 new foreign Chinooks by 2022. Looking at Q3, international customers represented 35% of revenue and 40% of its current backlog. Q3 revenues also grew 6%. [1]

Now the Congress has been supportive of proposed defense budget for fiscal 2016 in the U.S., and this appears to be the only hope for Boeing’s domestic defense segment in the near term. The proposed budget gives strong indications of substantial recovery in overall military spending. Since Boeing derives majority of its defense-related revenues from the U.S. government, the company’s sales may pick up pace in 2016. For now we estimate a decline in segment revenues in 2015 as well as 2016 but we’ll closely watching for defense related deals in the international market, as that can help Boeing offset a significant portion of declines seen in the U.S.

Key Earnings Takeaways and Outlook:

  • Total operating revenues rose 9% year-over-year to $25.9 billion
  • Core EPS stood at $2.52, compared to $2.14 in Q3 2014
  • Total airplane deliveries stood at 199 as compared to 186 in the prior year quarter
  • Commercial airplanes orders of $13 billion in Q3 and backlog stood at $426 billion
  • Boeing revised its 2015 revenue guidance to $95 – $97 billion and core EPS to $7.95 – $8.15

See Boeing’s Q3 Earnings Release

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Notes:
  1. The Boeing (BA) Dennis A. Muilenburg on Q3 2015 Results – Earnings Call Transcript, Seeking Alpha, Oct 21, 2015 [] [] []
  2. Boeing’s SEC Filings []