Boeing’s Results Will Soar On Higher Commercial Airplane Deliveries

Boeing (NYSE:BA) will announce its third quarter earnings Wednesday, October 23. The aircraft manufacturer will likely post strong growth in sales and profits driven by higher commercial airplane deliveries. Earlier in October, Boeing announced one of its highest quarterly commercial airplane deliveries ever as it raised production rates to make timely deliveries against its growing order book. The company delivered 170 commercial airplanes to airlines worldwide in the third quarter, up from 149 in the prior year period. ^{[1] [2]} The increased deliveries were driven by production rate hikes of narrow body 737s and the wide body 787 Dreamliner.

However, Boeing’s growth in the third quarter from commercial aviation could be offset in part by weakness in its defense segment. This segment, which constitutes over a third of the company’s total sales, is under pressure from lower defense spending from the U.S. government. Boeing is especially vulnerable to this fall in the government’s defense spending as the latter constitutes over 80% of its total defense sales. ^[3] In the third quarter, we figure Boeing’s defense sales could fall due to government austerity.

Nonetheless, for full year 2013, driven by its commercial airplane business Boeing anticipates its revenues to rise to ~$83-86 billion, up from $81.7 billion in the prior year, and earnings to rise to $5.10-5.20 per share compared to $5.11 per share last year. ^{[4] [3]}

See our complete analysis of Boeing here

Commercial Airplane Segment To Drive Third Quarter Growth

The commercial airplane segment constitutes a little less than two-third of Boeing’s top line. It is in this segment that Boeing is seeing strong growth driven by rising demand for air travel from the emerging markets and replacement (of older aircraft) demand from the developed markets. In addition, higher profits at most airlines over the past few years driven by a recovery from the financial crisis and consolidation, has enabled airlines to place large orders for new airplanes with aircraft manufacturer such as Boeing, Airbus, Bombardier and Embraer.

In the current year through September, Boeing received orders for 890 airplanes taking its backlog to a high of 4,787 airplanes. ^{[5] [6]} At current production rates, it will take the company over seven years to clear this backlog.

Thus, Boeing is hiking production rates of some of its highest selling models which include the narrow body 737s and the wide body 787 to make their deliveries on time. Accordingly, in the first quarter of this year, the company increased the production rate of its 737s to 38 airplanes per month from 35 per month. Thereafter, in May it rolled out the first 787 Dreamliner at an increased production rate of 7 airplanes per month, up from 5 per month. These production rate hikes drove up Boeing’s third quarter commercial airplane deliveries by 14% annually to 170 airplanes.

Government’s Defense Cuts Could Weigh On Results

On the flip side, Boeing’s defense sales could decline in the third quarter due to cuts in the government’s defense spending implemented under sequestration, which came into effect in March. The company stated in an earlier filing that these cuts could reduce the U.S. government’s defense spending by $42.7 billion in fiscal 2013, which ended on September 30. ^[7] Boeing, which is the second largest defense contractor for the government after Lockheed Martin (NYSE:LMT), will be hit from these cuts, and the impact could be severe as the company gets over 80% of its total defense sales from the government.

We figure that the government’s defense budget cuts will impact Boeing’s third quarter defense sales and partially offset its growth from commercial aviation. On its part, Boeing is working to increase the proportion of international sales in its defense sales to offset the impact from government spending cuts. However, in our opinion, this will take time as typically a defense contract from order to delivery spreads over multiple years. Thus, Boeing’s efforts to expand its international defense sales will likely not protect its third quarter results from cuts at home but help its results in the long term.

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1. Boeing reports third quarter 2013 deliveries, October 3 2013, www.boeing.com [↩]
2. Boeing reports third quarter 2012 deliveries, October 4 2012, www.boeing.com [↩]
3. Boeing’s 2012 10-K, February 11 2013, www.boeing.com [↩] [↩]
4. Boeing’s Q2 2013 earnings form 8-K, July 24 2013, www.boeing.com [↩]
5. Boeing’s 2013 orders through September, October 21 2013, www.boeing.com [↩]
6. Boeing unfilled orders through September 2013, October 21 2013, www.boeing.com [↩]
7. Boeing’s 2013 Q1 10-Q, April 24 2013, www.boeing.com [↩]