After dominating the Dubai Air Show with orders worth $101.5 billion, Boeing (BA) looks to be in an advantageous position when compared to European Aeronautic Defense and Space Company (OTCPK:EADSF) -- maker of Boeing's primary rival, Airbus. But all is not well in the American aviation camp; Boeing is still in the process of getting its "wish list" accepted as it looks for a suitable location to shift its 777X carbon-fiber wing and fuselage operations. More importantly, from the air show's results it is obvious that the new 777X is very high in demand -- this has put the current 777 program in jeopardy and Boeing's medium-term performance along with it.
The 777 accounts for 25% of the company's revenue; at present, Boeing has 3.3 years of backlog for the 777, whereas the 777X is not projected to be delivered for more than seven years -- i.e., ETA 2020. There will be a gap in supply and demand for Boeing's 777 by the time 2018 comes around. It is highly likely that the current 777 production will need to be trimmed from 100 planes per year now to around 65 per year by 2018. Such a scenario would significantly hamper Boeing's ability to expand free cash flow and reported earnings in the years ahead.
Boeing's financial health has long been under discussion after a delayed launch and troubled delivery of the 787 Dreamliner. The company has only delivered 96 Dreamliners up until now, but plans to boost aircraft production for the future. On the debt front, Boeing has successfully reduced its debt/equity ratio, as shown in the table below. Its cash outflow in the form of interest payment is limited, helping keep the costs to a minimum and creating little exposure to interest-rate risk.
While always maintaining enough liquidity to meet its short-term obligations, Boeing's deflating financial leverage and a stable operating margin address confidence concerns for investment. Looking at the financial figures available today, Boeing is a low-risk investment with little volatility in its profitability and return to shareholders. On the stock front, Boeing's stock price has grown by 81% over the last one year, eclipsing its rivals despite uncertainty looming over the ongoing talks with the labor union in Washington State.
Earnings Yield ttm
Net Income Growth (3 Yr Avg.)
Revenue Growth (3 Yr Avg.
Dividend Yield, %
Return on Equity
Source: Financials from Morningstar.
Boeing's P/E ratio and earnings yield illustrate the cheap price at which the stock is trading currently. In comparison to its rivals EADS and Embraer (ERJ), Boeing has the upper hand in revenue and net income growth. EADS' PEG ratio suggests rapid growth but also high risk with the European venture, which is currently going through somewhat of a transition. The company is currently downsizing its defense and space business to focus solely on Airbus, but faces stiff opposition from labor unions and shareholders Germany and France since the move will bring about thousands of job cuts. Embraer, on the other hand, is the third-largest aircraft manufacturer and is looking to build further on the 61 of its aircraft, which are flown by Middle Eastern operators. The company expected to deliver 130 Ejets by 2021 as an alternative to Boeing and Airbus.
The majority of growth and expansion in the aircraft industry stems from the Middle East. The big money in aviation is shifting to the Middle East and Asia; orders from the region provided a boost to Airbus' beleaguered A380 jumbo jet, the world's largest passenger plane. And three Middle Eastern airlines signed up to buy 225 of Boeing's new 777X jets, helping to bring the initial batch of orders for the plane to $95 billion. Furthermore, 150 of Boeing's new 777 mini-jumbos have also been ordered by Emirates in a deal worth $76 billion.
Boeing's innovative product offerings and placement are its strong suit; its 777 mini-jumbo sales represented "the largest product launch in commercial jetliner history by dollar value." The production ramp up of the Dreamliner 787 is in line with the growing global demand for the carbon-composite aircraft. While the 777 production will slow down by 2018, its share in the company's revenue will be taken over by the 787 Dreamliner -- especially since Boeing has received 1,000 orders for the Dreamliner, faster than any other wide-body airplane in aviation history.
Numerous global airlines have made the 777 the cornerstone of their long-haul fleets as a result of its range, various seating options, and fuel-efficient twin engines. The new 777X will enhance those qualities including a larger, composite-fiber wing that folds at the tips, while burning roughly 12 percent less fuel than the current 777. Until 777X's deliveries start, the 777 and 787 Dreamliner will continue to keep Boeing at the forefront of aircraft sales. Consequently, one should not expect the company's revenues to falter since this is not the first time Boeing has rolled out a new aircraft. Boeing is a strong buy, with nothing else in sight.