Boeing’s Impressive Commercial Airplane Lineup & Backlog Underpin Its $142 Fair Value

Over the last few years, Boeing (NYSE:BA) has posted impressive growth in its results, driven by higher commercial airplane deliveries. As airlines from the developed as well as developing regions of the world placed orders for new airplanes, Boeing’s commercial airplane backlog  jumped to nearly 5,200 airplanes at the end of last month, from around 3,770 airplanes at the end of 2011. ^{[1] [2]} This sharp growth in the company’s backlog over just two-and-half years forced it to hike its production rates and this has resulted in both higher deliveries and stronger results.

Looking ahead, with an impressive commercial airplane lineup in both narrow-body and wide-body airplane segments, we expect Boeing’s backlog to remain near its current high level over the next few years. This consistent high backlog will in turn propel the company to continue to raise the production rates of its highest selling models such as the 737. Higher deliveries resulting from these production rate hikes will further raise the company’s results in the coming years.

Having said this, its not as if Boeing is not faced with challenges. The airplane manufacturer faces greater competition from Airbus in the wide-body airplane segment with the latter’s A350, which is expected to enter service later this year. New airplane makers such as China’s Comac will likely also take some market share away from Boeing in the Chinese market, which is one of the fastest growing sectors. Apart from these threats to its commercial aviation business, Boeing is also faced with flat-to-declining U.S. military spending, which accounts for a lion’s share of its defense segment revenues. Nonetheless, in our view, despite these challenges Boeing will likely be able to grow its results in the coming years on solid gains from a growing global commercial aviation market.

We currently have a stock price estimate of $142 for Boeing, around 5% ahead of its current market price.

See our complete analysis of Boeing here

Huge Commercial Airplane Backlog Will Drive Boeing’s Results Over The Coming Years

At the end of May, Boeing’s commercial airplane backlog consisted of nearly 5,200 airplanes, which is equivalent to roughly seven years of production at current rates. Thus, airlines that place orders for new airplanes now will have to wait for many years before they receive their deliveries. In order to cut down on this waiting time period, Boeing is raising production rates across its most popular airplane models, such as the narrow-body 737 and wide-body 787 Dreamliner.

Over the past couple of years, the company has raised production rates for both these airplane models. It first increased its 737 production rate in the first quarter of last year to 38 airplanes per month, from 35 per month. Thereafter, in March this year, the company achieved a production rate of 42 airplanes per month. And, during its last quarter’s earnings presentation, the company reiterated that it will further increase its 737 production rate to 47 airplanes per month by 2017. Similarly, at its 787 program, Boeing reached a production rate of 10 airplanes per month during the first quarter, compared with a production rate of around five airplanes per month in the first quarter of last year. These higher production rates resulted in Boeing delivering 161 commercial airplanes to airlines in the first quarter, up from 131 it delivered in the same period last year. As a result, the company’s first quarter revenues rose by 8% year to year to $20.5 billion. ^[3] In our opinion, this trend of higher deliveries raising results will likely continue over the next few years as Boeing’s backlog continues to rise. Even in the first quarter, despite increased deliveries, the company’s backlog jumped as it received orders for 235 airplanes while it delivered 161 airplanes. ^[3] Boeing also forecasts its backlog to rise through 2014, as it anticipates orders will continue to exceed deliveries in coming months.

We figure even beyond 2014, Boeing’s backlog will likely not fall significantly as global airline passenger traffic continues to grow strongly. Boeing, in its long term market outlook, forecasts global airline passenger traffic to grow by 5% per year through the next two decades. ^[4] This steady growth in demand for flights will push airlines to continue to expand their fleets. At the same time, airlines also continue to battle with persistently high jet fuel prices which constitute close to a third of their total operating expenses. In such an environment, Boeing’s airplanes that promise large fuel savings, such as the 787 Dreamliner, 737MAX and 777X, become particularly attractive to airlines. So, driven by the positive demand outlook and its own fuel-efficient airplane offerings, Boeing will likely continue to see orders flow in at healthy rates. This will sustain its backlog, allowing it to continue to raise its production rates, airplane deliveries and earnings.

The challenges that Boeing faces from international airplane manufacturers may dent some of its market share, but the solid growth anticipated in the global commercial aviation market will likely enable the company to grow its share of revenues in the coming years. Airbus with its A350 has increased the competition for Boeing in the wide-body segment, which is currently dominated by the latter’s 787 Dreamliner and 777. At the same time, regional airplane manufacturers such as Embraer and Bombardier are looking to build larger airplanes that will increase competition for both Boeing and Airbus. And, most importantly, the entry of China’s Comac in the narrow-body airplane segment with the C919 could reduce both Boeing and Airbus’s market share in the fast growing Chinese market. But, since new airplane models take several years to establish, we figure on the global level, the Chinese Comac C919 will not significantly threaten established manufacturers such as Boeing and Airbus. Additionally, Boeing will benefit from its global service network which new entrants will take many years to set up. Thus, despite challenges from competitors, Boeing in our view is well positioned to grow its commercial airplane segment results in the coming years.

Boeing’s Heavy Reliance On U.S. Military Spending Threatens Growth In Its Defense Segment

The company is not as well positioned in its defense business which constitutes the remaining roughly 35% of its top line. Boeing is among the largest defense contractors of the U.S. government. And with military spending from the government forecast to remain flattish through this decade, growth in the company’s defense business will be hard to come by in the coming years. This was also reflected from the company’s previous quarter results in which its defense segment revenues fell by 6% year to year to $7.6 billion. ^[3] Boeing is highly dependent on U.S. military spending as the latter constitutes roughly 70% of its defense segment revenues. The remaining 30% of the company’s defense segment revenues come from international sales. The bright side of the situation here is that a higher 35% of Boeing’s defense backlog is comprised of international orders, which will likely rise in the coming years driven by rising military spending from the Middle-East and Asia. ^[5] Therefore, in the coming years, Boeing will likely reduce its dependence on U.S. military spending.

On the whole, we believe Boeing’s gains from the growing commercial aviation sector will more than offset its challenges from other airplane manufacturers and the flat-to-declining military spending in the U.S.

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1. Boeing’s unfilled orders through May 2014, June 6 2014, www.boeing.com [↩]
2. Boeing Wraps up 2011 With Record-Breaking Order Announcements, 2012 Expected to be ‘Year of the 737 MAX, January 5 2012, www.boeing.com [↩]
3. Boeing’s 2014 Q1 earnings form 8-K, April 23 2014, www.boeing.com [↩] [↩] [↩]
4. Boeing’s long term market outlook, June 6 2014, www.boeing.com [↩]
5. Boeing’s 2014 Q1 earnings transcript, April 28 2014, www.boeing.com [↩]