Can Boeing Co (NYSE:BA) Fly Past The Turbulence?

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Stiff competition and weak demand for cargo carriers are some of the issues that threaten Boeing Co (NYSE:BA)’s growth. Will the anticipated increase in global commercial passenger traffic fuel demand for commercial carriers to help Boeing offset the headwinds? This Boeing analysis article examines the challenges and opportunities of the world’s largest manufacturer of aircrafts. But first is a summary of 1Q2016 results.

1Q2016 summary

Boeing Co (NYSE:BA) posted adjusted 1Q2016 EPS of $1.74, short of $1.97 posted in the corresponding quarter a year ago and the consensus estimate of $1.81. The bottom-line number was hurt by a $156 million charge related to KC-46 Tanker program. However, revenue of $22.63 billion rose 2% YoY and also exceeded the consensus estimate of $21.24 billion.

The chart below shows Boeing’s revenue and cost of revenue for the last five quarters:

BA

What’s exciting about Boeing?

  1. Anticipated strong demand for commercial aircrafts

It is estimated that commercial airline fleet will double within the next two decades courtesy of strong growth in commercial passenger traffic. Of the anticipated demand for commercial carriers in the coming years, Asia is expected to account for 40% of the demand with North America and Europe combined accounting for another 40%. The rest of the world is expected to contribute the remaining 20%.

As the world’s largest manufacturer of aircrafts on the basis of orders and revenues, Boeing stands to benefit from the anticipated uptick in the demand for commercial carriers in the next two decades. The company is positioning itself for the anticipated growth by investing more in product innovation and capacity expansion to ensure that it is capable of providing the best commercial aircrafts and deliver them quickly to satisfy the demand.

  1. Capacity expansion roadmap

Boeing Co (NYSE:BA) recently updated on its production and expansion targets. The company plans to significantly increase the production of the 737 jet over the next few years. For example, the company wants to be able to produce 57 737 jets per month in 2019, up from 52 jets per month in 2018 and 47 jets per month in 2017. The company is currently able to produce 42 737 jets per month.

Plan to ramp up the output of the 737 comes at a time when Boeing continues to see strong demand for the aircraft. In 1Q2016, the company delivered 121 jets of the next-generation 737 model single-aisle. Boeing is see particularly strong demand for the 737 in China.

Boeing also detailed plans to boost the production of the 787 Dreamliner so that it can make 14 jets per month by the end of the current decade. In 2016, the company is targeting to manufacture 12 787 Dreamliners a month. The upgraded 787-10 Dreamliner is expected to enter assembly this year and have its maiden flight in 2017 with possible first delivery expected in 2018.

As Boeing expands capacity, it will be able to shorten delivery periods and speed up the conversation of inventory into revenue.

  1. Expanding product portfolio

Boeing is considering venturing into the midsize airplane market to compete with Airbus’ A321neo. A move into the midsize jets would see Boeing plug a gap in its product portfolio. The gap that needs to be filled by a line of midsize jets falls between Boeing 737 jet and the 787 Dreamliner.

  1. Strong international sales

Boeing Co (NYSE:BA) remains focused on growing market share internationally and those efforts seem to be paying off. In 2015, the company reported that 59% of its revenues came from outside the U.S., a show of strengthening international business. Boeing continues to see strong demand from abroad as international accounted for 37% of 1Q2016 backlog.

To fuel its international expansion, especially in Europe, Boeing acquired German software maker Peters Software GmbH late last year. Peters Software sells software used in pilot training and its products are based on the European aviation standards. The acquisition of Peters Software should accelerate Boeing’s market share gain in Europe.

Expansion abroad should also help Boeing offset the pressure coming from Airbus encroaching on its domestic market with an A321neo production facility.

  1. Defense business

Boeing registered a 19% growth in sales in its defense division in the latest quarter thanks mainly to strong demand for the P-8, C-17 and F-15. The company’s diversified portfolio comes as a major advantage in supplying the defense market.

  1. Favorable shareholder orientation

Boeing Co (NYSE:BA) returns value to shareholders through a combination ofdividends and shares repurchases. During 1Q2016, the company repurchased shares worth 3.5 billion, effectively taking 29 million shares out of the market. In the same period, the company distributed a total of $717 million in dividends. The company plans to repurchase $10.5 billion worth of shares over the next two years.

What’s worrying about Boeing?

  1. Stiff competition

There is a time when being the largest player in a market doesn’t make you comfortable and Boeing knows that now. The company is set to face fierce competition in the commercial carriers market as rivals in Russia, Canada and China begin the delivery of their commercial jets that could displace Boeing aircrafts. In particular, Boeing is expected to face increased competitive pressure in the market for its 737 jetliner. Rival manufacturers in Russia, Canada and China are working on their versions of Boeing 737 comparable aircrafts.

Additionally, the expansion of Airbus in the U.S. with the setup of the production plant for the A320 means increased competition for Boeing in its domestic market.

  1. Soft demand for cargo planes

Weakness in the cargo air transportation market is disrupting Boeing Co (NYSE:BA) and is threatening the company’s revenues and profits. To deal with the softness in the demand for the cargo planes, Boeing announced plans to curtail the production of the wide-bodied 747-8 aircraft. As such, Boeing intends to only manufacture 0.5 747-8 jets per month starting September 2016 down from 1 aircraft per month that it used to produce.

  1. Fixed-price contracts

A significant portion of Boeing’s revenue comes from fixed-price contracts. Because of the fixed-price arrangements, Boeing’s profitability hinges on its ability to produce at costs below the contract prices.

  1. Aircraft purchase financing

Boeing Co (NYSE:BA) used to be a major beneficiary of the Export-Import Bank (Ex-Im) until the credit agency’s charter came to an end mid last year. A substantial number of Boeing’s foreign customers used Ex-Im to guarantee their orders and about 15% of Boeing’s customers used the credit agency’s financing.

Although the White House has approved the reauthorization of Ex-Im, shortage of board quorum means that the credit agency cannot currently back deals worth $10 million or more. That means that some of Boeing’s customers who used Ex-Im to back their orders have been adversely impacted.

Takeaway

Boeing Co (NYSE:BA) appears to have the gas and determination to fly past the storms in its industry. But it won’t be an easy flight as departure and arrival schedules could be delayed.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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  • GarryGR

    “As the world’s largest manufacturer of aircrafts on the basis of orders and revenues, Boeing . . .”, Boeing it the largest manufacturer of aircraft, but not on the basis of orders. Airbus has made taking in more orders than Boeing a marketing tactic, reporting more orders each year, 12 out of the last 15 years, and so has a larger order backlog than Boeing. But, since 2012, they have been delivering fewer planes than Boeing, and planes are not paid for until they are delivered. You probably made an assumption that since Boeing is the larger manufacturer of aircraft, it must be taking more orders – but that’s not the case. Now, a story on why that is, would be interesting! 😉

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