In the world of investing, the strength of the industry in which a firm operates is sometimes as important as the company itself. A strong industry backdrop offers the potential for fundamental upside as the industry revenue pie grows. Said differently, it is much easier for a firm to do well in an expanding industry where both the industry's revenue pie is growing and market share opportunities are available, than it is for a firm to do well in a shrinking industry, where it may have to battle entrenched competitors in a pricing death match to gain share.
Though commercial aerospace will always be cyclical (as it relates to order trends) and pricing competitiveness will always be present, the massive backlogs of unfulfilled orders (already booked) at the airframe makers is simply remarkable - with the better part of a decades' worth of orders already in hand.
Boeing (NYSE:BA) showcased its enviable revenue visibility when it posted strong first-quarter results Wednesday. The company ended the quarter with a total backlog of $440 billion, nearly five times the high end of its revenue guidance range for 2014 ($90.5 million). This measure is roughly flat from the end of 2013, up from $390 billion in 2012, and $355 billion in 2011 (shown in image below). Compared to revenue of just a few years ago, the current level of backlog is nearly 8 times 2011 revenue, for example - a staggering multiple, given that 2011 can likely be considered mid-cycle performance, despite Boeing almost being over its head developing and producing the 787 Dreamliner at the time.
Image Source: Boeing
During the first quarter, the firm booked 235 net commercial airplane orders, and its commercial backlog swelled to over 5,100 planes valued at $374 billion. The value of the commercial backlog is more than 6 times the expected top-line results of its Commercial Airplanes segment in 2014, and the tally of unit orders is roughly 7 times expected deliveries for this year. Boeing has significant flexibility to fill delivery slots in the years ahead, and we think the company remains one of the most attractively-positioned firms across the industrials sector.
On a non-GAAP basis, Boeing's first-quarter revenue advanced 8% thanks to higher commercial aircraft deliveries, while core operating earnings jumped 12% thanks to a 30 basis-point improvement in its core operating margin. Operating cash flow before pension contributions more than doubled to $1.1 billion during the quarter, while free cash flow came in at $615 million (up from roughly flat in last year's quarter). Excluding a tax credit that occurred in the prior-year period, Boeing's core earnings per share leapt 14%, to $1.76. Though the aerospace giant increased its 2014 outlook on the basis of a tax settlement benefit (non-core), we continue to believe that aerospace remains one of the strongest industries across any sector. CEO Jim McNerney reiterated this view in the release:
Our outlook for the full year remains positive on the strength of demand for our fuel-efficient new commercial airplanes, our solid position in global defense, space and security markets, and our enterprise focus on meeting customer commitments, improving productivity and profitably delivering the growth in our sizable backlog.
Boeing's balance sheet is not as healthy as we would like it to be (given the cyclicality of operations and the investment required for future new aircraft platforms), but the company remains comfortably in investment-grade as it relates to credit health. Cash and investments in marketable securities totaled $12.2 billion, while debt totaled $8.9 billion at quarter-end.
Valuentum thinks it's difficult to go wrong investing in aerospace, and the research firm's favorite idea continues to be Precision Castparts (NYSE:PCP), as the firm not only benefits from the burgeoning backlogs at the airframe makers, but also is not levered to whether Boeing or Airbus wins - its products are ubiquitous. Precision Castparts is also led by one of the best CEOs in Valuentum's coverage universe, Mark Donegan, and he knows how to take costs out of businesses and new acquisitions like no other that we've seen. Our fair value estimate of Precision Castparts is nearly $300 per share (click here), offering material upside to holders. We value Boeing's shares at $128 each (click here), roughly in-line with its current trading price at the time of this writing.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. PCP is included in Valuentum's Best Ideas portfolio. 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.