Boeing (BA) reported better-than-consensus top and bottom line results for its second quarter. Revenue advanced 9% thanks to higher deliveries of the 787 Dreamliner and the workhorse 737 platform, while backlog grew to a record $410 billion (nearly 5 times expected 2013 revenue), including $40 billion of net orders during the quarter. Core earnings per share jumped 13%, as operating cash flow (before pension contributions) more than doubled, to $3.5 billion. Free cash flow generation in the period was just over $3 billion, or nearly 14% of revenue. Management raised its 2013 revenue outlook to the range of $83-$86 billion thanks to improved performance in its 'Defense, Space, & Security' segment and upped its core earnings per share guidance for the year to the range of $6.20-$6.40 per share, reflecting a 7% year-over-year increase.
Total deliveries in the second quarter jumped 13%, as revenues and operating earnings in its 'Commercial Airplanes' division advanced 15% and 20%, respectively (segment margins improved 50 basis points). The division booked 481 net orders during the quarter, swelling the segment's commercial backlog of unfulfilled deliveries to 4,800 airplanes (valued at $339 billion, over 6 times expected 2013 commercial revenue). Total 'Defense, Space, and Security' revenues were flat in the period as improvements in 'Network & Space Systems' and 'Global Services & Support' offset weakness in 'Military Aircraft' from lower delivery volume. Segment earnings from operations, however, advanced 4%, as margins inched upward 40 basis points. Boeing's defense backlog advanced to $71 billion in the period, with roughly 37% from international customers. Boeing Capital continues to shrink, with revenue and earnings from operations falling in the period.
The strong performance at Boeing follows a solid second-quarter showing at United Technologies (UTX), which issued results Tuesday. The firm recently doubled down on the strength of aerospace with its acquisition of Goodrich in 2011. Revenue in United Technologies' second quarter advanced 16% thanks to net acquisitions (organic growth was flat), but segment operating profit leaped 15%, while earnings per share increased 5%, to $1.70. Free cash flow generation during the period was $1.57 billion, or about 10% of sales.
Though new equipment orders at Otis were strong (up 23%) and UTC Climate, Controls & Security equipment orders showed signs of life, orders for large commercial aircraft engine spares advanced 65% at Pratt & Whitney during the period (15% on an organic basis). Strength was sufficient for management to raise the lower end of its 2013 earnings per share outlook to the range of $6-$6.15 (was $5.85-$6.15), implying year-over-year expansion of 12%-15%. Management also noted that organic top-line growth would improve in the back half of the year, but the team revealed that 2013 revenue would come in at the lower end of the previous range ($64-$65 billion). Though the latter was not spectacular news, we're not worried about United Technologies' ability to drive sales expansion, given its increased exposure to the strengthening aerospace end market.
While the market continues to overreact to the ongoing teething pains of the 787 Dreamliner as it relates to Honeywell's (HON) emergency locator beacon, we continue to focus on the burgeoning commercial aerospace backlogs at the airframe makers-Boeing and Airbus. And while this is a notable positive for the airframe makers and engine makers, General Electric (GE), United Tech's Pratt & Whitney division, and Rolls Royce, we continue to prefer smaller opportunities within the aerospace supply chain (for now). Our Best Ideas portfolio has already reaped the enormous benefits of positions in EDAC Tech and Astronics (ATRO), and we continue to hold Precision Castparts (PCP) as a key way to capitalize on aerospace strength. The upper bound of our fair value estimate range of Precision Castparts suggests further upside.