American aero major Boeing (NYSE:BA) had a dream run during 2014 in terms of order wins, deliveries, earnings reports, and outlook. But surprisingly, the positives didn't trickle down to its stock, which is trading around $130 as of Jan. 5, 10% lower than its 52-week high of $144. Let's take a closer look at the good, the bad, and the ugly of Boeing's 2014 and find out how the company is positioned for the current year.
The bad and the ugly
Boeing's defense business was in a tough spot throughout the year. The U.S. government's tightening of the defense budget had a direct effect on companies like Boeing that manufacture military aircraft, tankers, and surveillance equipment. With a revenue contribution of 38% to the overall top line for 2013, any weakness in this segment spells trouble for the company.
In the first nine months of 2014, Boeing's revenue from the defense business is down 4% to $23.2 billion compared with $24.3 billion in the year-ago period. Adding salt to the wound was a $272 million charge the company had to take in the second quarter, on account of additional engineering and systems installation work for the KC-46A tanker. Boeing expected to post $30 billion-$31 billion in defense sales in 2014, which would be a 6% fall from 2013. Had it not been for the spectacular performance of the commercial airplanes business, the defense dip would have pinched the company harder. (More on the positives of the commercial airplanes business to come.)
The Dreamliner program's escalating deferred cost has been another big problem for Boeing. During the third-quarter earnings call, the jet maker declared that the deferred production cost has surpassed the $25 billion mark and the company expects it to increase further. The cost went up as Boeing is spending more money on building an inventory of components for the 787-9 to ensure smooth production. But the hit taken by free cash flow due to this has not gone unnoticed. In the third quarter, free cash flow went down to a dismal $317 million from $2.3 billion generated in the year-ago period. In the first nine months, free cash flow stood at $2.2 billion in contrast to $5.3 billion in the same period last year.
If Boeing fails to improve the health of its cash flows in the coming quarters, it may exert undue pressure on dividends and buybacks as the company is hiking capital expenditure to enhance production.
Commercial business that accounts for 61% of revenues spearheaded Boeing's growth in 2014. According to the planemaker's last update, it has bagged 1,317 net commercial airplane orders this year.
An order for 150 777X planes valued at $56 billion from leading Gulf carrier Emirates was the highlight of the year in terms of new orders. Emirates also reserved the right to order another 50 777X. The deal has given Boeing a formidable lead over Airbus in the wide-body segment. The other significant order has been from Ryanair for 100 737 MAX-200s valued at $11 billion at list prices. Fellow Fool Rich Smith's comparative analysis shows Boeing might reclaim its position as the world's top aircraft manufacturer from rival Airbus.
Boeing has delivered 52 more commercial planes in the January-September period compared to the same period last year, as it has boosted the production rate of its best-sellers, such as the 737 and 787. Delivery of 31 787 Dreamliners was the highlight of the third quarter ended September 2014. These higher deliveries are translating into record revenues not just for the commercial segment but for the company as a whole.
Companywide revenue in 2014 is expected to top the record figure of $86.6 billion registered in 2013. From January to September, Boeing has garnered revenue of $66.2 billion, which puts the company in line to achieve its yearly forecast of $87.5 billion-$90.5 billion on the top line. In fact, the aero major is more likely to touch the upper end of the forecast, which means Boeing might leave last year's record behind by a good $3.9 billion. On the earnings front, the company lifted its annual core EPS outlook thrice in the year to $8.10-$8.30. In fiscal year 2013, the company had garnered a core EPS of $7.07. The solid support to earnings came from tax gains and efficient operations.
Boeing has delighted investors on the dividend front, too. Though it could not match last year's 50% hike, a 25% raise was more than welcome as analysts were predicting at best a 15% boost. The aero major has even increased the share repurchase plan to $12 billion from $10 billion last year. It completed the buyback for 2014 by spending $6 billion. In spite of the precarious free cash flow and need to increase capex, this move speaks of the company's confidence in its ability to stay on top of the market.
Boeing's commercial and defense businesses went in opposite directions in 2014, and weak cash flows have hurt the company. But the strength in the commercial segment could continue to offset the defense failing in 2015. Boeing has a solid backlog that could further boost deliveries. Also, 2015 could be a landmark year for the 787 Dreamliner as it is expected to sell at a profit. If Boeing can improve its cash position along with this, there could be a lot going for the stock.
ICRA Online and Eshna Basu have 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.