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Dow 30 Earnings: Boeing - Third Quarter 2011
Aerospace and Defense behemoth Boeing (BA – Free Boeing Stock Report) has released better-than-expected September-period financial results. For the quarter, share net jumped to $1.46, well ahead of our $1.04 estimate, and 30% higher than the year-earlier figure. The top line reached $17.7 billion, an increase of 4%, year over year. A good amount of commercial aircraft orders and deliveries, along with healthy margins at the company's two major divisions (Commercial Aircraft and Defense Space & Security), fueled the bottom-line advance. Boeing stock moved notably higher in the trading hours immediately following the release.
The company delivered 127 aircraft in the third quarter, compared to 124 last year. Due to a better sales mix and lower operating costs, Commercial Aircraft's operating margin remained above 11%. During the quarter, Boeing completed flight testing activities on its new models, the 747 Freighter and the 787 Dreamliner. In fact, first deliveries of the much-anticipated 787 occurred just a few weeks ago. Also during the September interim, the company launched the 737 MAX, the new engine variant for its very popular commercial model. During the quarter, Boeing booked 255 net orders, and its total backlog remains huge, at more than 3,500 airplanes valued at $273 billion.
The Defense Space & Security division also performed well. Although revenues were flat, year over year, increased sales of more profitable products helped the operating margin increase 160 basis points, to 10.0%. Boeing was awarded several contracts during the quarter, including orders for CH-47 Chinook helicopters and to provide support and logistics to India's new airlifter program.
All in all, it was an excellent quarter for Boeing, and management raised its 2011 share-net guidance to $4.30-$4.40. However, the increased guidance appeared to stem entirely from the September-period performance, and we are lowering our fourth-quarter earnings estimate by $0.13, to $0.95. Management stated that it will likely deliver a total of 15 to 20 new 747 and 787 models in 2011, down from its previous estimate of 25 to 30. It looks like a good deal of these deliveries will be pushed into 2012, and not contribute to December-period results. For the year, we now forecast that Boeing's bottom line will reach $4.44 a share, a bit higher than management's range.
Looking further out, we anticipate a sizable share-net advance in 2012, helped by increased demand for Boeing's commercial aircraft. We believe that the United States economy will continue to improve at a modest pace and that passenger air travel will increase. We suspect that several airlines will possess the financial flexibility and eagerness to replace their aging fleets with new aircraft. In anticipation, Boeing continues to increase production schedules for its popular 737 and 777 models. Also, now that the 787 is ready, demand for this aircraft should remain elevated for some time. Due to less flight testing activities, we expect that margins will widen further. Boeing's huge commercial aircraft backlog ought to support full production for many years. We estimate that the company will post 2012 share earnings of $5.30, almost 20% higher than this year's probable tally.
Meantime, we continue to like this Dow-30 component as a long-term holding, as it offers worthwhile appreciation potential to the 2014-2016 timeframe. In addition, the dividend is well covered and the yield is currently around 2.5%. That said, some risks are present. A good percentage of Boeing's revenues are derived from sales to the U.S. military. At this time, a number of government officials are searching for ways to cut spending, and it is likely that the Defense Budget will continue to be a focus. Boeing designs and manufactures numerous defense products, ranging from radios to fighter aircraft. Currently, it is too early to tell which programs will be reduced or cut, but we feel that Boeing stands to lose some business over the next decade. Going forward, we suggest that current and prospective shareholders monitor Congress and the White House for actions in regard to the Defense Budget.
About The Company: The Boeing Company is a leading manufacturer of commercial jet aircraft. It also produces fighters (F-15, F/A-18), C-17 cargo carrier, V-22 helicopter, E-3 AWACS, E-4 command post, E-6 submarine communicator, ground transportation systems, develops the space station, and does work on the F-22 (ATF). In 2010, foreign sales accounted for 41% of overall revenues, and R&D amounted to 6.4% of sales. The company has roughly 160,500 employees.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.