We previously analyzed and evaluated The Boeing Company (BA) versus EADS (EADSY.PK) and we concluded that despite Boeing's recent troubles with the Dreamliner, we would prefer to invest in Boeing due to its superior profit generation versus EADS. We then added Lockheed Martin (LMT) and Northrup Grumman (NOC) to our competitive analysis and evaluation and we concluded that Boeing is not only in a stronger position than EADS, but that it has less exposure to the "fiscal cliff" that everyone has been freaking out about. We have no illusion that Boeing will face headwinds to growth in its Defense, Space and Security unit due to the military budget sequestrations associated with the defense cutbacks scheduled in the fiscal cliff, we believe that it is much better positioned for growth than Lockheed Martin or Northrup Grumman due to its larger portfolio of commercial operations. Although EADS has seen its net income more than double in the YTD 2012 period versus YTD 2011 levels thanks to higher profit margins, its profit margins are still below its all-time high of 5% in 2005. Although Boeing's profit margins have been depressed due to cost overruns associated with the 787 Dreamliner, we believe that Boeing's margins are poised for takeoff in 2013 and beyond and that Boeing will soar above the turbulent skies of the fiscal cliff.
Sources: Morningstar Direct
Commercial Air Businesses:
Both Boeing and EADS/Airbus checked in with strong commercial results. Boeing regained leadership in this segment with regards to planes delivered and revenues generated from Airbus. Boeing delivered 149 planes during Q3 2012 and 436 for YTD 2012, up from 127 and 349 in the respective prior periods. Boeing received 1063 new orders in YTD 2012 and has a 4,100 plane backlog which will enable it to generate $307B in revenue in future years. Boeing is looking to increase its production further in order to ease that backlog and enable customers to get the new fuel-efficient airplanes in their fleets sooner. Even with the dilutive impact of 787 and 747-8 deliveries, Boeing Commercial Airplanes generated 28% increase in revenues and 6% increase in segment operating income for the most recent quarter. Year to date results were even stronger as the division generated 37% revenue growth and 37% segment operating income growth.
EADS's Airbus subsidiary also enjoyed strong in 2012. Airbus achieved 17% revenue growth in Q2 2012 versus the comparable period last year and 15% for the first half of 2012. We took note of Airbus's strong improvements in EBIT for the quarter. Airbus EBIT grew by 310% for the quarter and accounted for its H1 2012 EBIT growth in euro terms. Airbus Commercial delivered 279 airplanes to customers and booked 230 net orders during the first 6 months of 2012. Net orders were down versus the 640 achieved last year at this time. Even though Boeing has struggled with cost overruns and delays associated with the 787 Dreamliner, Boeing Commercial's operating margins of 9.9% for YTD 2012 is three times higher than EADS/Airbus's 3.3%. Furthermore, Boeing Commercial's Q3 2012 Operating Income is still 10% higher than EADS/Airbus's YTD 2012.
Defense Related Businesses:
Boeing, Lockheed and Northrop saw mostly positive results in each company's defense related operations due to the impending slowdown for defense related spending as part of the fiscal cliff. Boeing Defense, Space & Security saw revenue declines of 4.4% for the quarter and 3% YTD. Operating income growth was soft due to lower sales volumes associated with the slowdown in US defense spending being offset by growing demand in international markets.
EADS saw positive growth overall in its Defense related business and was able to buck the negative revenue trend that its American competitors faced. EADS generated €12.5B in its portfolio of defense related businesses during the first half of 2012, up from €11.6B in the prior period. Weakness in its Airbus Military operations and soft results from Cassadian were offset by strong growth from Eurocopter, Astrium and its other defense related operations in order to enjoy a 25% increase in adjusted EBIT for the first nine months. Even though EADS has taken steps to improve its results here, Boeing still outperforms EADS in this segment. We can see that one thing EADS's military and government related operations have in common is that both generate less US Dollar equivalent operating income in 9 months than Boeing's respective divisions can generate in three months.
Lockheed Martin had 2% revenue declines and benefited from increased income from equity affiliates and a 5.3M reduction in shares outstanding over the last 12 months to post an 11.06% growth in its EPS from continuing operations for Q3 2012.
Northrup Grumman had seen the largest revenue decline in the period for our four company peer group. NOC's product revenue declines by 7.75% during the quarter and 9.9% year-to-date and its service revenues declined by 1.73% in the quarter and 46bp year-to-date. Although NOC cut its operating costs and expenses to meet the reduced revenue levels, it was not enough to overcome the revenue declines and resulted in operating income declining by 10.8% in the quarter and 6.9% year-to-date. Although the company reduced its outstanding shares by 11% over the last 12 months, the company's EPS declined by 1.5% in Q3 2012 and only increased by 6.2% on a continuing operations basis.
We think that it was a rational move for Northrop to buy back shares in the wake of softening defense and government spending headwinds. Northrop has the strongest balance sheet of the peer group because it has the smallest pension plan deficit and we believe that the company can use the downturn to opportunistically harvest cash flows and utilize the cash flows to reward investors through special buybacks and dividends. However, we don't expect any organic growth from the company due to the fiscal cliff and appropriation sequestrations for the DoD.
Source: Morningstar Direct
Boeing came into 2012 with a heavily levered balance sheet due to its accrued liabilities for underfunded pension plans and retiree health care plans. Despite growing its assets by 2% in the first half of 2012 relative to the close of 2011, Boeing actually reduced its outstanding liabilities by $600M and boosted its total shareholders' equity by 65%. Boeing reduced its pension deficit by $1B as $500M in new pension obligations were offset by $1.5B in discretionary contributions for 2012. In our previous report on Boeing, we estimated that increased cash collections in the second half were achievable and that Boeing could potentially generate $5B in operating cash flows for 2012. It turns out that we were right about the increased cash flows, but we were too conservative in our forecasts as Boeing raised 2012 OCF guidance to $5.5B. We were too conservative with our free cash flow guidance as we expected $3B in FCFs for 2012 based on $5B in OCFs and $2B in expected CapEx. Based on updated management guidance for 2012, we have raised our forecast to $3.7B in FCFs based on $5.5B in OCFs and $1.8B in expected CapEx.
In conclusion, Boeing, EADS, Lockheed and Northrup all posted positive results despite facing challenging macroeconomic headwinds. Of these four leading aviation and defense companies, we would prefer Boeing because it is the worldwide leader in the commercial aviation segment and because of its progress in resolving the 787 Dreamliner issues. We were especially pleased to see that Boeing's Q3 revenues were the fifth straight quarter than Boeing had grew its revenues faster than EADS. Boeing also grew its revenues faster than Lockheed and Northrup Grumman. Lockheed and Northrup saw its EPS growth come primarily from cost cuts and share buybacks. We believe that once Boeing reduces its pension plan deficit further and generates profitability from the 787 Dreamliner, it will be able to join Lockheed and Northrup in buying back shares or boosting the dividend per share. We continue to see growth in Boeing's commercial segment offsetting the weakness in the defense segment. We continue to expect faster growth from Boeing than EADS in the future because we see the European debt crisis resulting in weaker economic growth in the European market versus the US market. While EADS saw improvements in its profitability, its YTD 2012 profits were less than Boeing's Q3 profits. Another reason why we like Boeing versus EADS is that Boeing still has its founders name as the name of the company while EADS and Airbus seem like generic names thought up by committees of European technocratic socialists. Our last reason why we prefer Boeing over EADS is that not only does Boeing pay a bigger dividend but that it hasn't been cut since 1970, whereas EADS has had to cut or skip dividends since its 2006 dividend peak.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: This article was written by an analyst at Saibus Research. Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this article. We have no business relationship with any company whose stock is mentioned in this article. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.