The Boeing Company's (BA 2.29%) stock has had a great run in the last five years (up 245%) and it's understandable if investors are starting to wonder whether there are any legs left in it. The answer to that question probably lies in the trajectory of long-term global economic growth and its impact on passenger traffic and the commercial airline industry. However, what's indisputable is that Boeing is positioning itself very well in order to maximize profits in the coming years. Here's how and why the company is in good shape for 2018.
Data source: The Boeing Company presentations. Chart by author.
Boeing commercial airplanes margin
Expanding Boeing Commercial Airplanes (BCA) margin is a key aim for Boeing in the coming years, and the second-quarter earnings presentations saw the company confirming good progress on the matter. There are three things to look at.
First, for the second consecutive quarter Boeing raised full-year BCA margin guidance. In six months, management has gone from margin guidance of above 11% to above 11.5%. It may not seem like much, but if you annualize the second quarter's BCA revenue of $14.48 billion then a move from a margin of 11% to say 11.6% would mean a 5.5% increase in earnings in the segment.
Second, on an underlying basis, Boeing's BCA margin performance is even better. CEO Dennis Muilenburg outlined that the KC-46a Tanker program (aerial refueling aircraft) took a $307 million charge due to higher-than-expected testing and developmental costs. Excluding these costs means underlying BCA margin was 13.5%
Third, CEO Dennis Muilenburg reiterated that BCA was "driving toward" a " mid-teen margin by the end of the decade". Of course, there's the possibility that the 777X research & development costs could overrun as the aircraft is developed for its first delivery in 2020, but in general, Boeing is making excellent progress on BCA margin expansion.
Aircraft production ramps
As Boeing produces more planes its unit cost of production tends to drop leading to margin expansion. Moreover, increasing the production rate reduces the backlog and induces airlines to make more orders because the time to delivery will be shorter. Indeed, as you can see below Boeing plans to increase the production rate on the 737 & 787 while bridging the gap between legacy 777 production and the new 777X.
|
Planes per month |
2017 |
2018 |
2019 |
|---|---|---|---|
|
Boeing 737 |
47 |
52 |
57 |
|
Boeing 777 |
5 |
3.5 |
3.5 |
|
Boeing 787 |
12 |
12 |
14 |
Data source: Boeing presentations.
However, there are question marks on these plans. There are legitimate doubts about the ability of suppliers to keep up with the production ramp on the 737, and whether legacy 777 and 787 Dreamliner orders will be enough to justify the plans above.
The good news from the earnings presentation was that Muilenburg affirmed these plans. He acknowledged challenges on the 737 (fuselages and engines), but claimed the production ramp was planned "in a very deliberate and disciplined manner."
Meanwhile, the 777 bridge was helped by "19 net new orders in the quarter, bringing the backlog to 96 aircraft." Muilenburg talked of "renewed strength in the cargo sector" and cited recent 777 freighter orders from FedEx, DHL and Qatar Airways as evidence.
Finally, the 787 Dreamliner won 59 orders in the quarter and now has 650 firm orders in backlog -- that's nearly four years worth of deliveries based on the planned 2019 rate of 14 a month.
Image source: Getty Images.
Boeing Global Services
The BGS segment is interesting because it should help reduce the cyclicality of Boeing's earnings -- airplanes still need servicing even when orders dry up -- and recent partnership deals with France's Safran to develop auxiliary power units and the $3.2 billion purchase of aerospace parts company KLX are a sure sign of Boeing's commitment to growing the business.
That said, the second-quarter results were slightly disappointing. BGS segment revenue grew 15% in the quarter but margin declined to 14.7% from 16% in the same quarter last year. Meanwhile, orders of around $4 billion were only in-line with revenue and backlog fell by $76 million to $20.4 billion.
Data source: The Boeing Company presentations. Chart by author.
CFO Gregory Smith said BGS was different to Boeing's other businesses and " you're going to end up with some ebbs and flows quarter-to-quarter depending on how that mix plays out." Moreover, BGS full-year margin guidance was maintained at around 15.5% but full-year revenue guidance was increased to a range of $15.5 billion-$16 billion from $15 billion-$15.5 billion.
Looking ahead
Boeing is making good progress on BCA margin and the production rate increases remain on target. Meanwhile, BGE growth will help offset any cyclical slowdown in the future. Provided airline profitability holds up then Boeing is on a good track in 2018 and beyond.
