The Hidden Factor Behind Boeing's Massive Profits

It's earnings season, and for defense stocks, investors will be looking at how defense-spending cuts are affecting defense companies' profits. Yet there's one defense giant for which investors will be more concerned about commercial profits than government profits. I'm talking about Boeing (NYSE: BA  ) , and, more pointedly, why commercial airline sales, such as for the 787 Dreamliner, have such a massive impact on Boeing's stock. 

Photo: Dave Sizer, via Wikimedia Commons. 

Money, money, money
As defense contractors go, Boeing is one of the largest defense companies in the world -- it's second only to Lockheed Martin (NYSE: LMT  ) in terms of revenue. But,where Lockheed gets an estimated 95.1% of its revenue from defense, Boeing only gets 38.4% from defense. The rest comes from commercial sales.  

A large portion of that commercial revenue comes from commercial airline sales. In fact, there's an estimated $100 billion-a-year jet market, for which a number of plane manufacturers compete. However, in the midst of that competition, Boeing is one of the top dogs and really sees major competition only from European Aeronautical Defense and Space's (NASDAQOTH: EADSY  ) Airbus. The rivalry between these two giants is intense, to say the least, because commercial airline revenue has a key impact on the companies' bottom line.  

Case in point: In its quarterly report, released on Wednesday, Boeing stated that it received $40 billion in new commercial aviation orders, beat projected profits, increased full-year-revenue guidance, and increased its operating margin for commercial airline production to 10.7 -- up from 10.2 during the same time last year. Furthermore, commercial aviation revenue rose 15%, while defense revenue remained flat. Following this news, Boeing's stock soared. Clearly, commercial aviation revenue is paramount to Boeing's bottom line. 

What to watch
Boeing has a number of lucrative planes available for commercial sale, but one that investors should keep especially close tabs on is the Dreamliner. It represents an evolution in aviation technology and is also Boeing's next-generation plane that airlines look at when they're going for modernization and improved fuel economy. For example, at this year's Paris Air Show, GE Capital Services, British Airways, Air Lease, United Airlines, and Singapore Airlines all placed orders for the 787-10 version of the Dreamliner -- which amounted to $30 billion in sales.

Right now, the Dreamliner's main competition is Airbus' A350. Both planes are next-gen, medium-sized planes, built for long-haul flights, and come with the bonus of improved fuel savings. Also, the A350 took its maiden voyage at this year's Paris Air Show -- and now that it's flying and not just a concept, Airbus' A350 will become more of a threat to Boeing's Dreamliner sales. Still, Boeing maintains that the Dreamliner gets better gas mileage, but Airbus counters the claim by saying the A350 is quieter and has lower operating costs.

What will happen with Dreamliner sales vs. A350 sales is anyone's guess. But considering how the Dreamliner affected Boeing's stock when it was grounded, and again when it was released from that grounding, investors should keep a close eye on the growing competition between the A350 and Dreamliner.

Boeing has a lot going for it, and it could make an excellent investment. However, there are risks to consider. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies, including Boeing, that could take off when the global economy gains steam. Click here to read the free full report!

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 27, 2013, at 9:58 AM, plange01 wrote:

    so far boeings new NIGHTMARE LINER that has a endless supply of problems has been given special treatment but has it come at the expense of peoples lives? nearly every day another problem is being made public and who know what does not make it to the long can this plane be allowed to fly?

  • Report this Comment On July 27, 2013, at 11:47 AM, operatingcosts wrote:

    Lowering Operating Costs is probably the single most important thing that BA has done in a long time. Increasing it's profitability of course made it more attractive to investors, but more importantly it positioned the company for additional expansion.

  • Report this Comment On July 27, 2013, at 5:32 PM, fpl1954 wrote:

    It's unusual for a war contractor to also make money in the free market capitalist economy. Boeing is an exception, and exceptional. The fact that they are willing to push the technology by making a composite airplane is VERY impressive. Long term of course everyone has to go that way, riveting sheets of metal is ancient technology that works, but is highly Q/C intensive. Composite airplanes can be made much cheaper with the same performance. Go Boeing!

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9/27/2016 11:19 AM
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