The Boeing Company (NYSE:BA) can do wrong -- or at least it seems that way right now. After an 89% rise in 2017, the stock is up another 25% year to date as I write. It's a startling performance in its own right, but given that most of the other major industrial companies are actually in negative territory this year, it deserves a closer look. What happened with Boeing in 2018, and can it continue?
The good things that have happened for Boeing in 2018 can be broken up into four main elements. The first, and most immediate, relates to the upgrades to earnings guidance.
Back in January, Boeing management's forecast range for full-year 2018 EPS was $13.80 to $14, but it has been upgraded throughout the year and now stands at $14.90 to $15.10. This guidance raise was thanks to an improving revenue and margin outlook in Boeing Commercial Airplanes (BCA) as well as a combination of a better organic revenue outlook for Boeing Global Services (BGS) and the acquisition of aerospace parts distributor KLX.
In a nutshell, BCA is executing well and managing to expand its margin -- CEO Dennis Muilenburg believes he can get BCA margin to at least 15% by the end of the decade, compared to his forecast for BCA margin of 12% to 12.5% this year -- even as Boeing ramps up production of the 737 to 52 aircrafts per month (47 per month in 2017) and prepares for another ramp to 57 per month in 2019.
Boeing overcomes concerns
Going into 2018, the market was concerned about the 737 production ramp-up and well-publicized supply chain difficulties. From lower-than-expected production of engines (CFM International -- a joint venture between GE and Safran) to fuselage issues (Spirit AeroSystems) and other components, the 737 production ramp has been challenged. Another concern was the so-called "bridging of the gap" in production between the legacy 777 and the 777X
Despite the difficulties with the 737, Muilenburg said, "We expect to recover the 737 line by the end of the year with fourth quarter deliveries expected to be above the production rate." Indeed, Boeing delivered 61 aircraft on the 737 programs in September.
Meanwhile, "renewed strength in the air cargo sector has provided support for the 777 bridge as highlighted by recent orders, bringing the backlog to 87 aircraft," according to Muilenburg on the third-quarter earnings call.
Boeing plans to dominate the commercial aviation industry by winning out over Airbus in the wide-body market while continuing to increase BCA margin by cutting supply chain costs and muscling in on its suppliers' margins by expanding its own manufacturing footprint. In addition, growth in BGS will help to reduce the cyclicality of Boeing's earnings.
The increase in BCA margin guidance in 2018 is a sign of ongoing improvement with these aims, while the $4.25 billion acquisition of KLX will enhance BGS revenue growth. In fact, BGS revenue grew 12% in the first nine months, and Muilenburg continues to believe BGS can grow above the long-term market growth rate of 3.5%.
In short, Boeing is demonstrating progress on its long-term strategic objectives.
Long-term outlook improves
As ever with the aviation industry, it's important to consider the cyclicality of its markets, particularly for BCA. As you can see below, it promises to be another good year for airline profitability, and load factors remain high -- airline profits usually mean good orders for Boeing and Airbus.
There are two other reasons Boeing's long-term outlook got better in 2018.
While Airbus is the leader in the narrow-body market, Boeing tends to win out in the wide-body market. That's good news because Muilenburg has "high confidence in a meaningful increase in widebody replacement demand early next decade," and airlines are believed to be waiting for the 777X to get further along in its development program before ordering any.
Boeing's wide-body orders could also receive a boost thanks to an improving outlook for global freight driven by e-commerce growth and economic expansion in Asia. Boeing sees the global freight market doubling in the next two decades.
Can it continue?
As the global economy goes, commercial aviation usually follows, and Boeing can be expected to do well. On a stock-specific base, the BCA margin progression is impressive, and management continues to successfully execute with regard to its production ramps.
On the downside, if there's more pressure on the supply chain, cautious investors might want to wait to see if Boeing hits its 737 production target for 2018 before concluding that the ramp-up in 2019 will be successfully achieved.
Otherwise, Boeing looks to be in good shape, and the transformation of its margin profile looks set to continue.