Boeing's F-15 Flies into Cloudy Skies (News) September 2, 1999

Boeing's F-15 Flies into Cloudy Skies

By Richard McCaffery (TMF Gibson)
September 2, 1999

Despite a $225 million pretax charge in the third quarter because of weak demand for F-15 fighter planes, Boeing (NYSE: BA) management said it's on track to hit revenue and earnings forecasts for 1999 as a result of operations improvements.

The aerospace giant expects 1999 revenue around $58 billion and earnings in the $1.5 billion to $1.8 billion range, compared to revenue of $56.2 billion and earnings of $1.1 billion last year.

The F-15 program makes up a major portion of the company's Military Aircraft and Defense unit, one of Boeing's three main divisions. In 1998, Boeing delivered 39 F-15s, more than any other type of military aircraft. The military division generated $1.3 billion in operating earnings in 1999 -- that's more than the whole company netted for the full year. No question, F-15s are of major importance to the company. But investors shouldn't base their valuations on the fate of F-15s. Who knows what will happen to worldwide demand, market conditions, etc.?

More important to investors are the operational improvements the company has made across the board, especially in the commercial aircraft group, which ran into such trouble two years ago it had to stop production on two lines of aircraft during the fourth quarter.

For the second quarter, operating margins in the commercial aircraft division improved to 4.3%, up from negative 2.3% last year during the same period. Operating margins in the military group improved to 11.5% from 10.2%. Only margins in the space division slipped during the second quarter, falling to 5.4% from 6.9% because of a contract adjustment. The company plans to have fully implemented operational improvements by the end next year and it will be crucial for investors to see where margins stand at that point.

Other measures the company has taken to streamline operations include selling off non-core units. In July, Boeing sold its government information systems group for a pretax gain of $95 million. This follows the sale of its commercial helicopter unit (how many folks out there really need helicopters?), as well as the sale of a technical services unit and electronic warfare business.

Balance sheet improvements include paying down a smidgen of long-term debt. Total debt now represents 35% of shareholder's equity, pretty respectable for such a capital intensive company. In addition, Boeing has accumulated $2 billion in cash and short-term investments, and bought back 51.5 million shares worth $2 billion to sweeten earnings for those who kept the faith during the company's ugly 1997.

At $45 a share, Boeing is trading at a 1999 forward P/E of 21.8. This is assuming it can hit its numbers for the next two quarters and slide into January with fiscal 1999 earnings per share of $2.06, which is Zacks mean estimate. The P/E is a bit high for a company expected to grow about 16% annually over the next five years. But with two-thirds of the world's commercial jet market and steady government contracts, Boeing will be around for a long time. It's worth another look as a core holding for investors who accept it for what it is -- a company that could be expected to modestly beat the S&P 500 over the long haul.

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