Higher Commercial Deliveries And International Defense Sales Will Drive Boeing’s Growth In 2014

Boeing (NYSE:BA) has posted impressive results in the first nine months of this year with strong growth in both revenues and profits driven by higher commercial airplane deliveries. The aircraft manufacturer is likely to end 2013 with a strong fourth quarter as well. In 2014, we anticipate Boeing’s commercial airplane business to continue to post robust growth on higher commercial airplane deliveries driven by its huge order backlog. In comparison, the company’s defense business, which constitutes slightly under 40% of its total revenues, will likely face a challenging environment due to reduced military spending from the US and many European governments. However, the company’s initiatives around cost cutting will likely help offset the impact on its 2014 profits from government austerity.

We currently have a stock price estimate of $124 for Boeing, around 10% below its current market price.

See our complete analysis of Boeing here

Commercial Airplane Segment Is Poised To Grow In 2014

Driven by strong order inflows, Boeing’s commercial airplane backlog rose from 4,373 undelivered aircraft at the beginning of 2013 to 4,777 undelivered aircraft at the end of the third quarter. ^[1] This expanding order backlog forced the company to hike production rates of many of its models including the 737, 777 and 787. The company hiked 737 production rate from 35 to 38 aircraft per month in the first quarter, and plans to raise this further to 42 aircraft per month in 2014. Boeing also increased 777 production rate from 7 to 8.3 aircraft per month in the first quarter. Finally, in the 787 program, Boeing achieved a production rate of 7 aircraft per month in May and currently expects to produce the 787 at a higher rate of 10 aircraft per month in 2014. ^[1]

Additionally, we do not expect these recent production rate hikes in the 737, 777 and 787 programs to be rolled back in 2014, as Boeing’s backlog remains very high. At current production rates, it will take the company nearly 8 years to clear off its existing backlog of 4,777 aircrafts. Thus, these higher production rates across Boeing’s three highest selling aircraft models will lift its commercial segment profits in 2014 through higher deliveries.

Separately, in our opinion, Boeing’s backlog could rise further in 2014 driven by strong order inflows from airlines worldwide. Airlines from the developed world continue to place orders for new aircraft to replace their aging fleets and airlines from the developing regions continue to place aircraft orders primarily to add capacity to their fleets. Looking at the coming year, these trends are likely to persist as airline profitability and air travel demand trends remain strong. Profits for the global airline industry are forecast to rise to $16 billion in 2014, from $12 billion in 2013, according to figures cited by Boeing in its third quarter earnings release. ^[1] While the global airline passenger traffic is expected to continue to grow in 2014.

For Boeing shareholders, higher profits in 2014 could mean stable stock repurchases and higher dividend payouts enabled by increased cash flows.

Defense Segment Could Witness A Challenging 2014

In comparison, Boeing’s defense segment could witness a tough 2014 due to reduced military spending from the U.S. and some key European countries. Sequestration impact will likely become more pronounced in 2014 if Congress is unable to come up with a deal, but this impact will be offset in part from growing international military spending.

On its part, Boeing continues to focus on growing its international defense sales to offset the impact from weak defense spending at home. This year, international defense sales are expected to constitute around 30% of Boeing’s total defense sales, up from around 7% five years back. We figure that in 2014, the company remains well-positioned to maintain this share of international sales in its defense sales, as of the roughly $70 billion in its defense backlog, nearly 40% is constituted by international orders. ^[2] This significant share of international defense sales in Boeing’s defense business will help it offset the negative impact from U.S. defense budget cuts.

Additionally, Boeing is reducing its cost structures assuming that sequester remains in place. We figure this realistic assessment will benefit the company even if the sequester ends next year, as in such a case reduced costs will provide an upside to its defense segment profits. So far, the company has taken several measures to slash its costs. These include reductions in overhead and corporate costs, headcount reductions and facility closures, including the recent decision to close down the C-17 production line. Looking ahead, the company continues to focus on slashing its costs which will likely help expand defense segment margins and profits in 2014.

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1. Boeing’s 2013 Q3 earning 10-Q, October 23 2013, www.boeing.com [↩] [↩] [↩]
2. The Boeing Company at Credit Suisse Global Industrials Conference, December 4 2013, www.boeing.com [↩]