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Summary

  • Boeing reports strong numbers in the second quarter on the back of strong commercial deliveries.
  • The company continues to see healthy order flow, keeping its backlog at record level.
  • The company’s strategic acquisition adds value to its current operations.

Boeing (NYSE:BA) is the world's leading manufacturer of commercial planes and military jets, selling aircraft to more than 150 countries worldwide. The company has five operating segments that include Commercial Airplanes; Defense; Space & Security; Boeing Capital, Engineering, Operations & Technology; and Shared Services Group. Boeing derives virtually the entire revenue from its commercial and defense segments with paltry contribution from other divisions.

In fact, the strength of its commercial aircraft business has helped the company overcome several challenges, including the present lull in the defense segment. Boeing recently reported its second quarter. The company's financials remain strong, and order books, sturdy. So, how does the aerospace behemoth stack up after the quarter?

Quarter at a glance
While analysts were quite upbeat about the American aerospace major's second quarter results, they were taken aback by an unexpected sizable pretax charge of $425 million to mend the wiring hitches found in the KC-46A tankers. Boeing chief executive Jim McNerney also thought that the tanker charge, which had a bearing on the company's quarterly results, was "disappointing." However, the aircraft maker's overall quarterly results were a good show of its strong operations.

The Chicago-headquartered company registered $22.05 billion in revenue, which is a mild gain of 1% over the year-ago period. Top line growth, despite weakness in the defense segment, came from strong commercial deliveries during the quarter. Revenue from commercial jet segment surged 5% to $14.3 billion, which compensated for the 5% revenue decline to $7.7 billion in the defense segment.

Early in July, the company said that it had dispatched 181 commercial aircraft in the second quarter -- a healthy rise of 7% from 169 planes delivered in the prior year comparable period. The 787 Dreamliner deliveries was the key highlight of this announcement, as for the first time the jet maker delivered 30 787s after having raised the production rate to 10 a month late last year.

Higher deliveries and greater operating efficiencies resulted in better operating margins for the commercial segment that expanded to 10.8%, up from 10.7% a year ago. However, this was partially pulled down by the pre-tax charge on KC-46A Tanker. Operating margins for the defense segment shrank to 7.5% compared with last year's 9.5%.

Higher deliveries helped the plane maker record better-than-expected net profit that shot up by an astounding 52% to $1.65 billion, translating to $2.24 a share as against consensus estimate of $2.02. This excellent hike, compared with last year's earnings per share of $1.67, was also aided by a one-time tax benefit of $408 million.

Orders and backlog
Boeing continues to see its firm order backlog rising at a decent rate. At the end of the first half of the year, the plane maker's total contractual backlog stood at $426.05 billion, up from $422.66 billion recorded at the end of 2013. The rise in backlog has primarily been on account of orders for commercial jets. The company has received net orders for 783 commercial jets year to date. In addition, Boeing has won "significant contracts in the quarter for military aircraft and satellites" that makes its backlog "large and diverse," said McNerney.

Boeing's order backlog has escalated to 5,237 units. The 737 aircraft continues to reign, forming more than 75% of the firm orders, followed by the 787 Dreamliner that makes for close to 17% of the backlog. At the Farnborough Airshow in July, the company bagged orders for 201 aircraft worth $40 billion. In July, Boeing also won a historic order for 150 777Xs from Gulf carrier Emirates with purchase rights for another 50, which is like a big jackpot for the company given the growing wide-body demand from Gulf operators.

Also, according to the company's market forecast for 2014-2033, there would be demand for around 36,770 commercial jets across the globe during this period. Of the total demand, nearly 70% is estimated to be for single aisle planes. And considering Boeing's dominant position in the narrow body jet space -- thanks to its 737 -- the aircraft manufacturer should benefit from the robust demand. Boeing's re-engineered fuel-efficient planes, the 737 Max and the 777X, are expected to be the company's aces that would attract solid orders in the future.

So, the company's prospects, considering that backlog is a proxy for future revenue flow, look solid. However, as backlog is piling, it would be good for Boeing to leverage its production capacity and manage its aircraft deliveries timely and convert them into revenue while enhancing cash flows.

Current outlook
The jet maker has raised its earnings per share guidance from $7.15-$7.35 to $7.90-$8.10. This is a reflection of the tax benefit of $408 million and the strengthening operational performance of the company. However, there isn't any change in revenue projection from the company's previous guidance in the range of $87.5 billion and $90.5 billion.

Defense cutbacks continue to hurt the company's progress. But advancement in the commercial aircraft division should drive financials. In 2014, Boeing projects to deliver around 715 to 725 commercial planes, which includes about 110 787s.

McNerney is positive about the company's prospects in the current fiscal year after delivering a strong performance in the first half of the year. The encouraging market outlook and improved productivity should support the plane maker in achieving increased earnings target.

Additionally, the company made two strategic acquisitions in the quarter that could enhance its capabilities over time. First, in May Boeing acquired AerData Group B.V. that offers integrated software solutions for managing leases, planning engine fleet, and managing records. The Netherlands-based company also gives technical assistance to jet & engine operators, and lessors, among others. Second, in June the jet maker acquired Ventura Solutions Inc., which offers hardware and software engineering solutions. These acquisitions should help Boeing tighten its information and security arrangement.

Concluding word
Boeing's commercial aircraft business is going from strength to strength. The acquisitions during the period have been good developments, enhancing Boeing's capability. The industry is witnessing strong demand for commercial aircraft, visible from the big orders placed by airlines. With a solid backlog and product portfolio, the company offers great value and looks poised for growth.

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

Source: Boeing's Operational Performance Stays Strong, Outlook Looks Bright

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