The aircraft manufacturing industry is expected to experience a boom as production levels appear to increase. The number of annual orders has shown remarkable improvement in FY12 which are likely to cause this improvement in production. The strong outlook for commercial aircraft is expected to produce decent appreciation in stock prices of aircraft producing companies. As yet, analysts have taken a holistic view towards the aircraft production industry as companies like Boeing (NYSE:BA) have been considered competitors of Northrop Grumman Corp. (NYSE:NOC). With the divergence of the performance of key indicators for each of these companies, we expect that the stock price of the two companies will not show similar trends anymore.
The above chart illustrates how the stock prices of three aircraft producing companies, Boeing , Northrop Grumman and Lockheed Martin Corp. (NYSE:LMT), have shown similar trends. We expect these stock prices to start diverging because of the nature of output produced by these companies.
Northrop and Lockheed produce aerospace systems which are designed particularly for specific customers most important of which are government agencies as these systems are used in a variety of missions. On the other hand, Boeing's major business segment is commercial airplanes which are essentially targeted specifically for commercial use. This segment contributes towards approximately 60% of the company's total revenue in FY12. The rest of the company's revenues come from Defense, Space and Security, Capital and other smaller segments.
Outlook for Commercial Aircraft
The commercial aircraft production and services industry appears to be demonstrating a decent performance. The demand has remained robust in the recent past and production levels also seem to be showing an upswing. In fact, Deloitte's 2013 outlook for commercial and business aircraft suggests that the production is expected to increase to a new a high.
Source: Deloitte s 2013 outlook
The above chart shows the forecasted production of commercial and business aircraft in FY13 based on the number of orders received. We can see that the production of aircraft increases one year after a rise in orders is witnessed. Applying this logic, aircraft industry is expected to post a record production in this year.
Outlook for Defense Aerospace Systems
On the other side of the fence, the outlook for defense aerospace systems and associated productions appears to be grim. The main reason for this expected decline is a fall in defense spending by most countries. Specifically, the decline in demand is expected because of a decrease in defense spending by major players like U.S., U.K. and some countries of Europe. The marginal increases in other countries like China and Saudi Arabia are not expected to do enough to make up for the decline in defense spending. The trend in the U.S. was initiated in FY11, but it is expected to gain momentum which is subject to the U.S. Budget Control effect which may also come into effect.
Along with the industry outlook, the short-term volatility also appears to be in favor of Boeing as the company resumes the delivery of its high-tech product, the 787 Dreamliner. After addressing the safety concerns regarding the jet's battery, the company's revenues are expected to improve substantially in FY13. Furthermore, looking at the imminent increase in demand for commercial and business aircraft, the company is looking to gain market share by attempting to raise production levels. The company has stated that it is looking to produce 10 Dreamliners a month by the end of FY13 and expects to maintain this rate of production in FY14.
Overview of Financial Standing
An overview of some key drivers suggests that the boost in the industry will pave the way for the company to further its growth.
The company's 3 year average revenue growth is 6.2% as compared 2.2% industry average. The decent gross margins have resulted in 3 year average net income growth of a staggering 43.8% as compared to industry average of 7.7%. As compared to competitors, the profit margins are weaker, but this is expected to change as the decline in defense spending will cause the companies to readjust their prices. Furthermore, global market for aircraft is also showing prospective growth and Boeing is in a strong position to benefit from this scenario.
As Boeing continues to address the concerns in its products, the company is set to benefit from the growth in the industry. The company is likely to be one of the major beneficiaries as it aims to improve production. Therefore, the short-term and long-term aspects of the company appear to be impressive. At the same time, a decrease in defense spending by some of the major players is likely to weaken the position of competitors. On the basis of these factors, a buy recommendation is proposed for Boeing for both short-term and long-term investors. As the equity markets begin to differentiate between the two kinds of aircraft producers, a clear distinction between the stock price trends will occur which will benefit the shareholders of Boeing.