Boeing's stock could be set to fly

Commercial aviation business wins new orders, while defense business looks resilient despite US government cuts.

By Trefis Jan 30, 2012 12:42PM
Image: Airline (© Christie & Cole/Corbis)Boeing's (BA) 2011 fourth-quarter earnings, announced last week, have given investors cause for cheer. The aerospace company's fundamentals are quite strong and it's poised for solid gains in 2012, in our view.

Boeing tackled the uncertainties of global economic growth, defense budget pressures and contraction in cargo volumes in an admirable way.

Through innovation and strong products and services, Boeing has won some key contracts in the past quarter, which also provide some visibility in its revenue stream for the coming years. For the full year 2011, Boeing revenues stood at $68.7 billion, an increase of 6.8% over 2010. For the fourth quarter of 2011, Boeing recorded an 18% increase in its earnings over the prior year's quarter. The operating margin increased by 1.5% in the fourth quarter, while for the full year, it stood at 8.4% as against 7.7% in 2010.

Boeing's principal global competitors include Lockheed Martin (LMT), Northrop Grumman (NOC) and Airbus (EAD).

Boeing has identified commercial aviation as the long-term business for growth, and this helped it to maintain focus and bag some big orders. It won 805 orders worth $75 billion in 2011, of which 379 were placed in the fourth quarter.

It delivered 477 planes in 2011, of which 128 were delivered in the fourth quarter. Boeing also extended its contract with the International Association of Machinists for four years, which should keep labor problems at bay.

Boeing's new aircraft, the 787 and 747-8, are also progressing smoothly. While the 747 has set new records for speed and distance, the 747-8 has received intercontinental certification. Boeing's new family of aircraft, the 737 Max, is turning out to be a star, with  over 1,000 orders in 2011. SouthWest Airlines placed the first firm order. Boeing has a record backlog of $296 billion in this segment. Sales for commercial airplanes increased by 30.4% in this quarter compared to the prior year, while its operating margin increased from 7.7% to 9.2%.

Boeing Share of Global Commercial Aircraft Deliveries

Boeing's defense and security systems showed no signs of pressure from budgetary cuts by the U.S. government as the company delivered 115 aircraft and 14 satellites for defense purposes in 2011. Although sales increased by just 3.6% and operating income remained more or less flat, the company bagged some key orders in this segment, which have exciting prospects for the future.

Some of the major contracts are:

  • F-15 sale agreement between U.S. government and Saudi Arabia
  • U.S Missile Defense Agency order for ground-based mid-course defense
  • U.S Air Force C17 Globemaster 3 Integrated Sustainment Program
  • U.S. Navy P-8A Low Rate Initial Production Lot II  award

Boeing Total DoD, NASA & Homeland Security (HS) Contract Spending

Boeing Capital Corporation has been the weak part of the company as it posted a pre-tax loss of around 8%. The unit is now taking on the role of supporting other business units while managing risk and portfolio. The portfolio of Boeing Capital Corporation stood at $4.3 billion at year end. This was unchanged during the quarter as most of the volume gains were compensated by asset impairment and aimed at shrinking of the portfolio.

Boeing Capital Corp EBITDA Margin

We currently have a Trefis price estimate of $91 for Boeing's Stock, around 20% above the current market price. We are in the process of updating our estimates post Q4 earnings.

See our full analysis of the Boeing stock here.

Jan 30, 2012 1:19PM
With all of the above said, all of that has been priced into the stock.
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