Passenger Aircraft Will Drive Boeing's Growth

Aug. 6.13 | About: The Boeing (BA)

Boeing's big win

Boeing (NYSE:BA) is the biggest winner in the most recent round of contracts awarded by the Pentagon. One contract was an $8.5 million fixed-price delivery order taken for its unmanned aerial vehicle subsidiary, Insitu, which will upgrade Navy RQ-21A "Integrator" tactical unmanned aircraft systems. But by far the biggest win was a huge contract worth over $2 billion to deliver P-8A Poseidon submarine hunting aircraft for the Navy, of which 13 will be delivered over the next three years.

Boeing's new used airplane strategy

It has long been standard practice in the automobile industry to buy used cars from potential buyers who can be induced to buy a brand new model. Borrowing from this practice, Boeing is buying back older versions of its 747 in order to sell its new 747-8, which are proving hard to sell. The company has picked up seven of the 19 747 jets sold in 2013, making it the single largest buyer. Sales of the new 747-8 are necessary to keep production lines going because the company is cutting back production by 13% and storing some unsold aircraft in the desert. This year's sellers of the older planes are airlines such as Cathay Pacific and Korean Airlines, all of whom are buyers of the new 747-8. Potential buyers for the 747-8 are turning away because cargo companies are increasingly shipping freight by railroad or inside passenger versions of large twin-engine jets such as the Boeing 777 because of better fuel economy and lower maintenance costs.

Experts are of the opinion that the buyback is a smart move because the new 747s, which sell for about $350 million each, have gathered only five orders this year, which were offset by five cancellations. The buybacks also help buyers of the new 747 by helping them to avoid losses on older planes that would otherwise have to be sold in a market with an oversupply of used planes. Nor can the older planes be converted into a freight carrier, which is the normal practice because of the weak market. For instance, Korean Air, which has sold six 747-400s to Boeing over the last couple of years agreed to buy five new 747-8s as part of a $3.6 billion fleet expansion. Similarly, Cathay Pacific, which has sold one 747-400 to Boeing this year has ordered 13 of the new 747s to be used for freight. The benefits of the strategy to the company are obvious. Moreover, the 53 pending 747-8 orders should keep the 747-8 production line busy to the end of 2015.

Second-quarter financials

Despite the well publicized problems with the 787 Dreamliner, revenues for the second quarter grew by 9% to $21.8 billion while net income grew 13% to $1.09 billion representing an EPS of $1.41 compared with $967 million and $1.27 per share in the same quarter of the previous year. Analysts had estimated an EPS of $1.30 per share and revenues of $20.8 billion. The company has raised its full-year EPS guidance to the range of $6.20 to $6.40 per share before accounting for pension expenses. Revenues for 2013 are expected to be between $83 and $86 billion.

For the quarter, revenues generated from commercial aircraft grew by 15% to $13.6 billion with profit growing by 20% to $1.45 billion. In the defense business, the automatic Federal spending cuts have taken their toll and revenues were flat at approximately $8.2 billion but operating profits grew by 4% to $776 million. The company started delivering 787s once more in the quarter after the gap of four months driven by the well publicized battery issues. It delivered 16 state-of-the-art jets during the quarter and still expects to achieve 60 deliveries this year, which is the same goal set before the battery issues surfaced. It has also increased the delivery of other aircraft such as the 737 and the 777.

The bottom line

The company has seen orders booming because of air line fleet expansion in Latin America and Asia and is considering increasing production for both the 737 and the 787. Against the current market price of $107.90, analysts have target prices in the region of $120.00 and there is also a dividend yield of approximately 1.8%. With the 787 problem behind it for the most part and the pressure on defense orders more than offset by civilian aircraft, the company looks poised to grow further and should be considered in the industrial sector, specifically aircraft manufacturing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.