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Production Ramp Ups Lift Boeing's Net & Positions It For Robust 2014
- In the fourth quarter, Boeing posted strong growth in its revenues and profits on higher commercial airplane deliveries driven by production rate hikes.
- The company's defense business also posted moderate growth despite lower U.S. defense spending.
- In 2014, Boeing's results will likely continue to grow driven by its recent 787 production rate hike and the upcoming rise in its 737 production rate.
Boeing's ( BA ) fourth quarter revenues and profits grew strongly as expected on higher commercial airplane deliveries driven by production ramp ups. The airplane manufacturer's revenues jumped by 7% annually and its earnings rose by 26% annually in the fourth quarter, to close a very strong 2013. For full year 2013, Boeing's revenues rose by 6% annually to $86.6 billion, and its earnings rose by 17% annually to $5.96 per share, driven by strong growth from its commercial aviation business. These 2013 results beat the company's prior guidance released in October last year.
Looking ahead, Boeing anticipates to deliver more airplanes to airlines in 2014, compared to 2013, which will likely continue to drive growth in its earnings. Recent elimination of across the board spending cuts, called sequestration, from the U.S. government's fiscal 2014 budget will also provide short term relief to Boeing's defense business, which constitutes around 40% of its top line. In all, the company looks set to post strong growth in 2014.
We currently have a stock price estimate of $124 for Boeing , around 5% below its current market price. We are in the process of incorporating fourth quarter earnings and shall update our analysis shortly.
Strong Order Inflows Prompt Production Rate Hikes Which Lifted Results
In the fourth quarter, Boeing delivered 172 commercial airplanes to airlines, up from 165 it delivered in the fourth quarter of 2012. This hike in its airplane deliveries was driven by production ramp ups across three of its highest selling airplane models - the 737, 777 and 787 Dreamliner. In the first quarter of 2013, Boeing increased its 737 production rate to 38 airplanes per month, from 35 per month, and its 777 production rate to 8.3 airplanes per month, from 7 per month. Thereafter, in May 2013, the company hiked its 787 production rate to 7 airplanes per month, from 5 per month. Driven by these production rate hikes, Boeing delivered 648 commercial airplanes in 2013, up from 601 it delivered in 2012. This figure is the highest ever commercial airplane deliveries made by Boeing in a single year and exceeded Airbus' 2013 tally by 22 airplanes.
Boeing is currently benefiting from an upcycle in the commercial aviation industry that has over the last few years seen strong orders for new airplanes from airlines worldwide. Airlines from the developed regions are placing orders for new airplanes to replace their aging fleets. At the same time, airlines from the developing world are placing orders to add flying capacity to their fleets. In turn, these strong order inflows from across the world are growing backlogs of airplane manufacturers like Boeing and Airbus. During 2012 and 2013, these strong order inflows from airlines expanded Boeing's backlog from 3,771 airplanes to 5,080 airplanes, prompting it to hike its production rates.
Even today, order inflows for commercial airplanes remain strong evidenced by net orders for 465 airplanes received by Boeing in the fourth quarter. Looking ahead, Boeing sees strong demand for new commercial airplanes to continue driven by steady growth in global air passenger traffic and gradual recovery in global air cargo traffic. Earlier this month, the company produced its first 787 at a higher production rate of 10 airplanes per month, and in the coming months, it will hike its 737 production rate to 42 airplanes per month, from 38 per month currently. On the back of these production rate hikes, Boeing anticipates to deliver around 715-725 commercial airplanes to airlines this year. Driven by these higher deliveries, the company anticipates its commercial airplane segment's revenues to rise by around 8-12% annually in 2014.
Defense Segment Results Show Moderate Growth Despite Government Austerity
Boeing's defense segment also posted good results in the fourth quarter despite a tough environment, especially in the face of lower defense spending from the U.S. government, which constitutes more than three-fourth of the company's total defense revenues. However, the government's budget cuts weighed on Boeing's defense backlog, which contracted to $49.6 billion at the end of 2013, from $55.1 billion at the end of 2012. On the bright side, in its earnings webcast, Boeing said that nearly 40% of its defense backlog is constituted by orders from international customers - a proportion that is much higher than share of international sales in its Boeing's defense revenues. This effectively means that international sales will likely constitute a larger share in Boeing's defense revenues in the future. We figure this will temper the impact from lower U.S. defense spending and help grow Boeing's defense segment results.