Personal Finance

Boeing Co. Investors Should Listen To This Company's Outlook


One of the largest aerospace and Boeing Co. (NYSE: BA) suppliers, Rockwell Collins, Inc. (NYSE: COL) , has released its first-quarter earnings and discussed its outlook for the aviation market in 2017. Let's take a look at what was said and what it means to the aviation industry and for Boeing.

Rockwell Collins in 2017

Management maintained the guidance it gave in October, so no surprises there. That's all well and good, but in reality Rockwell Collins' near- to mid-term outlook will be heavily influenced by its pending acquisition of B/E Aerospace Inc. (NASDAQ: BEAV) , a maker of aircraft seating and cabin interiors. Since the guidance doesn't include any assumptions regarding B/E Aerospace, the new outlook doesn't say much that investors don't already know about Rockwell Collins.

Aside from the inherent uncertainty with the acquisition, there's also likely to be some competitive changes now that key rival Zodiac Aerospace has been bid for by fellow French company Safran .


Data source: Boeing Co presentations. Chart by author.

What it all means

Otberg's business-jet outlook isn't much of a surprise. It's a cyclical industry, and clearly the economy needs to see more growth before business confidence grows enough to encourage new business-jet orders.

However, the commercial-jet outlook is interesting, because it creates mixed conclusions as the narrow-body aircraft market is set to do better than the wide-body market.

On one hand, it's positive that Otberg sees sustained growth in deliveries and strength in the narrow-body aircraft market. This comes as Boeing's orders appeared to have peaked in 2014 (see the preceding chart) and as the International Air Transport Association (IATA) forecasts that global airline net-tax profits will fall to $29.8 billion in 2017 from $35.6 billion in 2016.


Data source: IATA. Chart by author

On the other hand, Otberg's commentary with regard to continued softness in the wide-body aircgraft market would put some more pressure on Boeing if it proves to be accurate. Boeing is facing a challenge as it tries to bridge the gap between production of the 777 and the 777X .

Boeing generated just 17 net orders for the 777 aircraft in 2016, forcing the company to cut to production on the 777 to five a month in August 2017, down from a rate of 8.3 a month in 2016. Given that the 777 is a highly cash-generative aircraft for Boeing, and the 777X faces increased start-up production costs, any further pressure on 777 sales could create challenges, not least for Boeing's plans to increase cash flows in the coming years.

Looking ahead

All told, Rockwell Collins' company-specific outlook is positive, but its year will largely be defined by how events unfold with B/E Aerospace. Meanwhile, the industry outlook is broadly positive but contains some question marks for Boeing. The aviation giant releases its earnings Jan. 25, and investors would be well advised to listen for analyst questions on 777 production and whether Boeing can grow cash flow as it prepares for the debut of the 777X in 2020.

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Lee Samaha has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

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

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

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