Boeing’s Higher Commercial Deliveries Offset Defense Weakness

July 25th, 2013 by Trefis Team
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The Boeing Company
    Quick Take
  • In the second quarter, Boeing’s sales and profits grew at strong rates driven by higher deliveries of the single-aisle 737 and twin-aisle 787.
  • The company also raised its sales and earnings outlook for 2013 driven by a strong second quarter performance and increased international defense delivery volumes.
  • However, concerns from lower defense spending in the U.S. continue to challenge Boeing’s growth as the U.S. government accounts for over 80% of the company’s defense business.
  • On the bright side, Boeing’s confirmation on 787 and 737 production hikes later this year and next year, respectively, will drive growth in the near term.

Boeing (NYSE:BA) posted strong growth in its second quarter revenues and earnings on higher 787 Dreamliner and 737 deliveries. The aircraft manufacturer benefited from the resumption in 787 deliveries during the quarter after a three-month suspension following the grounding order from the Federal Aviation Administration (FAA). Boeing delivered a total of 16 787s to airlines during the second quarter, up from 6 in the prior year quarter. [1] The company’s second quarter results also benefited from a hike in 737 production rates driven by the aircraft’s expanding order backlog. Overall, Boeing’s revenues grew by 9% annually to $21.8 billion and earnings rose by 11% annually to $1.41 per share in the second quarter. [1]

The company received net orders worth $40 billion driven by high demand from the global commercial aviation industry, taking the total order backlog to a record $410 billion. [1]

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Additionally, Boeing raised its guidance for 2013 driven by strong second quarter performance. The company raised 2013 earnings guidance to $5.10-$5.30 per share on better than anticipated margins at its commercial airplane business, from $5-$5.20 per share guided in April. It also raised its 2013 top-line guidance to $83-$86 billion from $82-$85 billion announced earlier driven by higher international defense delivery volumes. [1] These forecast figures compare to the company’s earnings of $5.11 per share and revenues of $81.7 billion in 2012. [2]

However, despite the strong second quarter performance and year-over-year growth in forecast results, Boeing being the second largest defense contractor to the U.S. government faces an uncertain environment at its defense business. Budget cuts especially across-the-board spending cuts, or sequestration, which came in effect on March 1 pose a serious challenge to the company’s defense segment growth.

See our complete analysis of Boeing here

Defense Spending Cuts Create Uncertainty

Defense sales constitute around 40% of Boeing’s total sales and more than 80% of the company’s defense sales come from the U.S. government. [2] In light of this, the company is vulnerable to sequestration which is expected to reduce the government’s defense spending by $42.7 billion in fiscal 2013. [3] In its second quarter earnings filing, Boeing said that these these budget cuts would likely impact its defense business in 2013; however, the extent of impact is not clear yet.

On the bright side, Boeing’s defense backlog increased to $71 billion at the end of second quarter driven by international orders, which constitute around 37% of this backlog – significantly higher than the historical mix between international and U.S. volumes. [1] This will help the company weather some of the impact from budget cuts at home.

Production Rate Hikes For 787 And 737 Will Drive Growth

In the second quarter earnings, Boeing confirmed that it still expected to deliver over 60 787s to airlines in 2013. In the first half, it delivered 17 and during the second quarter, it completed battery enhancements on all in-service 787s that were delivered prior to the FAA’s grounding order. The company further reaffirmed that it would raise 787 Dreamliner production rates to 10 airplanes per month by the end of 2013 in order to make timely deliveries for their over 800 undelivered orders.

During the second quarter, Boeing successfully launched the largest version of Dreamliner – 787-10 – that can seat up to 330 passengers in a typical three-class seating arrangement. The company launched this plane at the Paris Air Show with over 100 order commitments from airlines across North America, Asia and Europe. This plane will help Boeing compete with the larger models of Airbus A350, which also made its first flight a few days prior to the Paris Air Show. (See The Boeing And Airbus Dog Fight Heats Up Over Orders At Paris Air Show)

Separately, at the 737 program, which constitutes around three-fourth of Boeing’s commercial delivery volumes, the company affirmed that it would raise production rates to 42 planes per month next year and thus equalize output volumes of 737’s Airbus rival – the A320. These production rate hikes at two of the company’s major programs – 787 and 737 – will help it continue to drive growth in earnings in the near future.

We currently have a stock price estimate of $88 for Boeing, around 20% below its current market price. We are in the process of incorporating second quarter earnings and shall update our analysis shortly.

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Notes:
  1. Boeing’s Q2 2013 earnings form 8-K, July 24 2013, www.boeing.com [↩] [↩] [↩] [↩] [↩]
  2. Boeing’s 2012 10-K, February 11 2013, www.boeing.com [↩] [↩]
  3. Boeing’s 2013 first quarter 10-Q, April 24 2013, www.boeing.com [↩]