Upside & Downside Scenarios to Boeing's $87 Value

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Boeing's ( BA ) most important business is the commercial airplanes division, which accounts for over 55% of our $87 price estimate for Boeing . The division provides commercial jet aircraft (such as 747, 767 and 777) to airline and leasing companies worldwide. Boeing also supplies military aircraft (such as the CH-47 Chinook Helicopter and the F/A-18 Hornet) and other defense, space and security-based products such as missile systems, satellite systems, intelligence and surveillance systems. Boeing competes in the commercial aircraft segment with aerospace giant Airbus as well as Embraer ( ERJ ) and other regional companies. In the defense segment, Boeing competes with other large defense contractors such as Lockheed Martin ( LMT ), Northrop Grumman ( NOC ) and BAE Systems.

Here we highlight 2 of the most important drivers for Boeing's business and the upside as well as downside risk posed for Boeing's stock based on these drivers.

  1. Boeing's Share of Global Commercial Aircraft Deliveries : Boeing constituted over 38% of all commercial aircraft deliveries in 2010.
  2. Commercial Airplanes EBITDA Margin : EBITDA margin for the commercial airplanes division stood at around 16% in 2010.

20% Upside Scenario: $105 Trefis Price Estimate for Boeing

1. Increased in global commercial aircraft deliveries (+10%):

We currently forecast Boeing's share of global commercial aircraft to increase in future years, primarily due to the expected commercial launch of the Boeing 787 Dreamliner in the latter half of 2011. With over 800 unfilled orders pending for the 787 and given its superior features, it represents a significant driver in capturing market share in the commercial aircraft sector. Boeing's market share can grow faster-than-expected given its higher fuel efficiency over similar sized-aircraft.

There could be a 10% upside to the Trefis price estimate if Boeing's share was to reach 52% (instead of the currently forecast 46%) by the end of the Trefis forecast period.

2. Improved EBITDA margins through new airplanes (+10%):

We currently forecast commercial airplane EBITDA margin to stay stable at around 16%. We expect higher earnings from the Boeing 787 and 747-8 (expected to be launched later this year) to be offset by future commercial launch of the Airbus A350, which would compete directly against the 787 in size, range and fuel efficiency, hence keeping EBITDA margin stable. Margins can see upside if the projected launch of A350 is delayed (currently planned in 2013).

There could be 10% upside to the Trefis price estimate if commercial airplanes EBITDA margin increased to around 18% by the end of the Trefis forecast period.

20% Downside Scenario: $70 Trefis Price Estimate for Boeing

1. Increased competition from Airbus (-10%):

Although we currently forecast Boeing's share to reach around 46% by the end of the forecast period, increased competition to the Boeing 787 can come from the Airbus, which claims that the A350 would have lower operating costs than the 787. Currently, the A350 has over 550 unfilled orders from 36 customers, and success of this aircraft would directly impact Boeing's share in the commercial aircraft market.

There could be a 10% downside to the Trefis price estimate if Boeing's share was to fall to 40% (instead of the currently forecast 46%) by the end of the Trefis forecast period.

2. Development delays pressure EBITDA margins (-10%):

Our current forecast of stable EBITDA margin for commercial airplanes is based on the projected launch of the Boeing 787 later this year. However, the 787 has a track record of various development and flight testing delays, and any further postponement would add to production costs as well as possible penalties from the customers. This would provide sizable downside to EBITDA margin for the division.

There could be 10% downside to the Trefis price estimate if commercial airplanes EBITDA margin decreased to around 15% by the end of the Trefis forecast period.

See our full analysis for Boeing's Stock



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: BA , ERJ , LMT , NOC , UAL

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