Let's gather some updates regarding Boeing Co. (BA), which is involved in creating wonders in the developed world. The company is involved in designing, developing, manufacturing and selling air vehicles and devices ranging from commercial jetliners to military aircrafts, satellites and missile defense. The company's big name is contributing to its 6.2% 3-year average CAGR that is well above the industry average of 2.1%. The top-line and the company's net income growth are also heavily outperforming the industry. The company has a 3-year average compound annual net income growth rate of 43.8% against the industry's average of negative 1.9%. As a result, the company can be regarded as an attractive investment opportunity with a TTM ROE of 52.4% in comparison to the 21.8% ROE earned by the industry.
The figures in the opening paragraph represent the company's historic performance. My article will focus more on the expectations held for the company and its performance during the fiscal year that just ended in December 2013. I will also consider the company's future prospects and growth brought in through industry trends and other on-going activities.
Recovery in Industry
The company has performed well, financially, during the past years despite industry headwinds. These headwinds include a slowdown in global travel demand and high fuel prices. Global travel demand declined due to the recession and slowdown in economic activity around the world while fuel prices surged due to the crises in the Middle East and sanctions on Iran. Now, with these sanctions loosened the global supply for crude oil will increase and will result in a reduction in fuel prices as shown in the chart below.
Customers will still be demanding more fuel-efficient vehicles due to fuel being a non-renewable source of energy. Boeing has been investing in this desired technology and hopefully it will support the company's sustainability. Additionally, as a consequence of using fuel-efficient vehicles, the margins for airline companies will improve and will result in the better financial position of Boeing's customers.
Airline Industry Analysis and Forecasts
Global economic growth and trade are fundamental drivers for this industry because they result in passenger traffic. Passenger traffic is expected to grow by about 5% in 2013, a growth rate that is close to the long-term forecast for the industry. Airline cargo was expected to continue softness in 2013. The 100-200 seat narrow-body - or single-aisle - aircraft market is projected to make $20 trillion (£12.8tn) over the next 20 years. Boeing itself predicts continued 5% annual increases in passenger and cargo traffic over the next 20 years.
These passengers will keep on considering low-cost carriers and emerging markets will be driving more growth for the industry. While Boeing estimates that more than 33,000 commercial aircrafts will be required over the next 20 years it calculates below 20% will be ordered by U.S. carriers as growth in travel is rapidly increasing in emerging economies.
More fuel-efficient airplanes will record high demand. Globalization and liberalization of air traffic rights between countries will also result in air travel growth in the coming years. Boeing forecasts a $4.5 trillion market for 34,000 new airplanes over the next 20 years. As far as economic activities are concerned, the global markets are exiting their recessionary drifts. Europe and Asia are moving towards improvement and in the U.S. growth is anticipated to rise to about 3%. The enduring increase in global transactions proposes another opportunity for airplane sales growth ahead. All of this should boost Boeing's revenues.
Now let's have a look at the company's backlog. This is also an indicator of the company's future performance and position as it tells about the growth in the company's business based on current contracts.
Source: BA 10-Q and 10-K Filings
Backlog for the company arises when the orders for the company's products exceed the products delivered by the company. The table above shows the pattern of the company's backlog while the following table shows the commercial airplane deliveries made by the company in the respective years. I am only considering data for commercial airplanes as this segment holds the major backlog for the company.
Source: BA 10-Q and 10-K Filings
By combining both tables above, you can see that the company's commercial segment has recorded 8.51% growth in its backlog despite 9.2% higher deliveries made during the year. Presently, a lot of information can be found regarding orders secured by the company. These include, GE Capital Aviation Services, the commercial aircraft leasing and financing arm of General Electric that recently placed an order of 40 737 aircrafts. The deal is worth around $4 billion and will add more to the company's total backlog that will be reported for 2013. Moreover, Boeing also won an order worth $4.4 billion to supply 42 Boeing 737 MAXs to Indian Airlines.
Overall, in terms of orders, by the end of 2013 the company will have around 5080 unfilled orders resulting in a 16% increase in backlog compared to 2012. In terms of gross commercial orders, the company recorded an increase of 14% in 2013 compared to 2012 by booking 1531 gross commercial orders.
In terms of deliveries made, by now the company has disclosed that it supplied 648 commercial aircrafts in 2013 reflecting a 7.8% increase from 2012.
Boeing's 737 deliveries rose 6% while its 777 deliveries were up 18%. Moreover, a 41% rise in deliveries of the 787 Dreamliner was noted with its unfilled orders improving by 14.6%. With 787 enjoying that much growth in new orders it may result in Boeing having the largest backlog of any single U.S. company if all those planes ordered in the coming 10 years are delivered.
As I have already discussed expectations for the company's growth with respect to the backlog for fiscal year 2013, a glance at the expectations for other financial matrices will also be essential.
Expected Results for 2013
The company is forecasted to register an income of $4.5 billion in fiscal year 2013 out of the $85 billion projected revenue. The market also expects the company's EPS to reach at $6.73 compared to $5.12 recorded for the past fiscal year.
After concluding the year at $136.49, analysts' price target for the company's stock at year-end was $150.13. Now Boeing is trading above $140 and the consensus price target is above $151.00.
Contract with Machinists
The company has finally reached a favorable conclusion with respect to its dispute with machinists. It finally persuaded its machinist union members to accept a new contract that ends their traditional pension and comprises other benefits and wage cuts. This decision is favorable for the company as it will reduce the company's annual costs by approximately $250-500 million according to Jefferies. As a result, the company's bottom line will receive support from this contract.
With a sound historic performance there are also positive expectations for the company's upcoming financial results for the most recently-ended fiscal year. Looking ahead, the industry outlook is supportive of the company's growth on the basis of world-wide economic recovery. Growth in the company's overall backlog, despite industry headwinds in the previous years, indicates the company's strength. The company is successfully obtaining new orders and adding more to its backlog. In addition to its up-coming top-line growth, a small improvement in the company's bottom-line will be experienced from the favorable contract with the machinists. All of these factors make it a company worth investing in and investors will receive profits when the company achieves its share price targets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article