Boeing looks to the future with increased confidence

On a day that an independent Commission in Britain has set out some possible options as to how the nation might belatedly come to terms with huge airport capacity problems and the continued growth of the airline industry, Boeing senior management has chosen to further please investors with a strong message and reward that says the company is set for a long period of growth.

After markets closed in New York last night Boeing Chairman, President and Chief Executive Jim McNerney told investors that the quarterly dividend paid to shareholders would increase by approximately 50 percent to 73 cents per share and that the company would also move forward with an additional $10 billion share repurchase plan. In the statement McNerney said that “these actions reflect sustained, strong operational performance by our businesses, increasing cash flow, and our confidence in the future,” adding that “relentless focus on business execution and competitiveness is providing the financial strength to continue investing in our core businesses while increasing our returns to shareholders.”

Confidence is everything to the investment community and not surprisingly large institutional investors have been ahead of the game in predicting a period of stability and growth for Boeing by marking up the shares by close to 80% during 2013. Is this new found confidence justified? Yes it certainly is. Boeing is rare amongst US companies in having such a large and versatile global customer base. And having gone through a protracted, widely publicised and very costly period of difficulty as it struggled to bring the most sophisticated technology, manufacturing and material capability available to create the most technically advanced civil airplane yet available it is good to see the company moving from problem-solving to a much more positive phase of growth.

True, the 787 ‘Dreamliner’ may have had more than its fair share of development and launch related problems in 2012 and earlier this year as this fine aircraft entered airline service but with close to one hundred aircraft now delivered and operating with a variety of global airlines suffice to say that with production rising the 787 programme does now appear to be working very well.

With over 1,000 of the Boeing 787 ‘Dreamliner’ aircraft now on order, and having just last month launched the newest and most advanced version of the highly successful 777 aircraft of which over 1,450 aircraft have so far been built for over 60 airlines worldwide, there is no shortage of interest in Boeing’s wide bodied planes. Having launched the 777X in Dubai last month, the company not only received the largest ever single order for a wide bodied aircraft but also walked away from the show with total orders for no less than 259 of the new plane worth $100bn.

Confidence in the wide bodied market segment looks to be more than fully justified in my view and the same may also be said for the narrow bodied aircraft market where Boeing continues to work through a massive 737 order book and in taking sizable orders for the newest version of the aircraft, the 737 MAX which is planned to enter service with launch customer Southwest Airlines in 2017 fifty years after the test flight of the original 737 programme aircraft.

In 2012 Boeing Commercial enjoyed earnings of $4.7bn on revenue of 49.1bn. Deliveries of commercial airplanes to customers rose 26% during the year and with it margins had also begun to improve. None of this more positive attitude and approach is to suggest that everything in the commercial aircraft camp of Boeing is humming. For instance it is certainly true that orders for the revised and enlarged 747-8 aircraft have been somewhat slower than hoped. For all that the forward picture for the commercial aircraft division has probably never looked better and with a total company order backlog worth $415bn of which Boeing Commercial accounts for around $345bn comprising 4,800 planes my own considered view is that the outlook for 2014 and beyond looks excellent.

Financially the company is doing very well too with operating profit up 16% to $1.8bn largely on the back of more aircraft deliveries (up 14% in the period) and with net profits rising by 12%. Note also that in the first nine months of the year operating cash flow exceeded $8.3bn which is double that reported during the same period in 2012. Free cash flow jumped from $2.1bn in the first nine months of 2012 to $5.3bn in the Q3 2013 results. In the year ahead cash flow is likely to be even stronger meaning that the 50% rise in dividend outlined in the company statement, which will push the total dividend cost to a little over $2bn, looks to be more than easily affordable.

Meanwhile although seemingly more than holding its own Boeing Defense, Space and Security is, like a great many other players in this market segment, suffering the effects of sequestration in US defense spend. The US is not the only country embarked on a cut back process in defence expenditure but for Boeing it is clearly the most significant. As a $33bn business employing 58,000 people Boeing is no slouch in defense. With an enormous product range including the F/A-18 Super Hornet and Growler, the F-15, Harpoon, JDAM, C-17 Globemaster, KC-46 Tanker programme, P-8A Poseidon maritime surveillance aircraft, Apache and Chinook rotary aircraft, the V-22 Osprey tiltrotor plus a variety of weapons, bombs and unmanned aerial vehicles there are good international opportunities. Boeing has a long history of strength in defense across the Middle East area and this is an area in which much concentration currently exists. Even so with US and Europe downsizing spend on defense and notwithstanding considerable efforts being made to access additional export market potential it would be wrong to project anything other than a degree of uncertainty remaining in this large market segment.

Boeing is nothing if not resourceful and while Defense, Space and Security which had relatively static $3.1bn earnings on revenue of $32.6bn in 2012 and may not be growing at an acceptable rate the division is expected to more than hold its own. Margins are important and Boeing can be expected to do all that it can to retain strong margins across the division.

So there we have it – a great company that in an already fascinating and further expanding market is doing very well. Yes, there is big competition out there and Airbus is also doing very well too. There is room for both and they will keep each other on their toes. Competition is healthy and if nothing else it breeds ongoing research and development. Over time other new competitors and threats will no doubt emerge from China, India, Russia, Canada and maybe from Brazil which already has the successful Embraer company manufacturing smaller passenger jets.

But with the huge technology lead that Boeing and Airbus have I suspect that in terms of continuing to develop and stay one step ahead of competitors producing fuel efficient and environmentally friendly aircraft that airline customers want, Boeing and Airbus will remain leaders in the field for a generation and more yet.

Growth is predominantly coming from China where Boeing expects the aircraft fleet to triple over the next twenty years with 5,580 new planes worth $780bn being ordered and from the Middle East where the company anticipated 2,610 new aircraft being required over the same period – about 900 of these will be replacement aircraft. Latin America is another area that is considered high growth with a requirement expectation of 2,900 new airplanes taking the stock in this region up to 3,790 by 2032. Mature markets such as North America and Europe may not be growing at the rate they once did but the company is still predicting that 7,290 new airplanes will be required in the North American market and that the total number of planes in the region will grow from a current 6,650 to 8,830 by 2031.

Howard Wheeldon FRAeS ,
Wheeldon Strategic Advisory Ltd
hwheeldon@wheeldonstrategic.com
Tel: 07710 779785

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