2 Questions Facing The Boeing Company's Investors

Boeing disappointed the market with its guidance, but its order book and airplane delivery rates are the key to its performance in 2014.

Feb 11, 2014 at 10:10AM

There are two key questions that Foolish investors will be asking after Boeing's (NYSE:BA) latest results. The first is what is its order book going to look like in 2014? The second is whether its disappointing earnings per share, or EPS, guidance of $7.00-$7.20 for 2014 signals a slower delivery schedule or not?

Boeing's order book prospects in 2014
Essentially, Boeing's orders are a proxy for global economic growth. However, they are also guided by industry fundamentals. The good news is that the commercial aviation sector is in better shape than it has been for many years. For example, in December the International Air Transport Association, or IATA, increased its forecast for airline profitability in the coming years.  

Boeing
Source: IATA

North America is expected to lead the way, and every other region is expected to increase profits, too. All of which marks a remarkable turnaround for an industry that struggled to make money in previous years. Indeed, this is a crucial point for Boeing, because there is a strong relationship between airline profitability and its orders.

Boeing
Source: IATA, Boeing presentations.

The chart illustrates three key points. First, airline profitability tends to dictate Boeing's order book, and if the IATA's estimate for airline profits in 2014 is accurate then Fools can expect Boeing's order book to do well in 2014.

Second, the difference between gross orders (blue line) and net orders (red line) represents orders that were cancelled in the year of the order. This graphic nicely illustrates that airlines will cancel or defer orders if the economy slows. In other words, you can't just listen to Jim Cramer screaming about the strength of  Boeing's order book and conclude that the company is immune from the economy.

Third, the industry is dealing very well with oil prices being around $100. In fact, Boeing is experiencing increased demand from airlines wanting fuel-efficient aircraft.

Boeing's delivery rate
Orders are one thing, and Boeing's ability to make money from them is another. On the evidence of analyst questions on the conference call, its earnings and cash flow forecasts for 2014 were a bit of a disappointment. Going into the call, analysts had a target of around $7.60 in EPS for 2014, but Boeing's management guided toward $7.00-$7.20. It's never good news to see a company guide lower than the market -- and the stock was promptly sold off on the news -- but Foolish investors need to appreciate that airplane delivery rates can be very lumpy.

In addition, Boeing has had widely publicized production problems with its 787 Dreamliner in the past, and it's understandable if its management feels the need to be conservative in its forecasting. Having achieved record deliveries of 648 in 2013, management predicted that it would deliver 715-725 planes overall in 2014. Within this figure, Boeing expects 110 deliveries of its 787 plane; a figure below its intended run rate of 10 deliveries every month for the 787. Indeed, Boeing is trying to manage as transition in increasing production from seven to 10 planes with the program, and this aspect of its production seems to carry the greatest risk for the company.

Boeing's 737 is a mid-range, narrow-bodied aircraft that represents the workhorse of many airlines worldwide. In fact, it contributed 1208 of its 1531 orders in 2013. Boeing is looking to increase its production rate from 37 a month to a rate of 42 by the end of the year. It certainly needs to keep its 737 customers happy, because it faces increasing competition from Bombardier's (TSX:BBD.B) new CS100 plane and from its traditional rival, the Airbus A319. Bombardier has aggressive plans for the CS100 ; however, it is facing production difficulties of its own after having to push back the date when it enters service to the second half of 2015, from its original estimate of 2014. This is obviously good news for Boeing and Airbus.

The bottom line
All told, Boeing looks set for a good year, but faces execution risk due to its plans to ramp up production on the 787 and 737. It's an inevitable consequence of the pressure to increase deliveries of ever more sophisticated aircraft. In order to stay up-to-date, Foolish investors should monitor Boeing's delivery reports, which are lovingly detailed on its website, and look out for the ramp-up to 10 a month for the 787, and 42 for the 737. Meanwhile, if the global economy holds up, then airline profitability will too, and Boeing can expect strong orders in 2014.

3 stocks to hold forever
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal "The Motley Fool's 3 Stocks to Own Forever." These picks are free today! Just click here now to uncover the three companies we love. 

Lee Samaha has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers