Boeing (BA) is one of the world's major aerospace companies. The company develops, produces and markets commercial jet aircraft (such as the Boeing 747 and 767), military aircraft (such as the CH-47 Chinook Helicopter and the F/A-18 Hornet) and other defense, space and security based products such as missile systems, satellite systems, intelligence and surveillance systems. Boeing also provides financing support such as loans and leases for its commercial & military aircraft customers. The company competes in the commercial aircraft with Airbus as well as Embraer and other regional aircraft makers. In the defense segment, Boeing competes with large defense contractors such as Lockheed Martin (LMT), Northrop Grumman (NOC) and BAE Systems (OTC:BAESF).
We recently launched coverage on Boeing with a $87 price estimate, which is over 20% ahead of its current market price.
Coverage Launch for Boeing: $87 Price Estimate
We have broken down our analysis of Boeing into 4 divisions and briefly highlight some of the key drivers to these divisions.
- Commercial Airplanes
- U.S. Defense, Space and Security Systems
- Non-U.S. Defense, Space and Security Systems
- Boeing Capital Corporation
The commercial airplanes division is the single-largest contributor to Boeing stock value, primarily due to the expected commercial launch of the Boeing 787 Dreamliner in the latter half of 2011. Having faced several development/technological delays in past years, flight testing for the 787 is 90% complete. And with over 800 orders pending for the aircraft,  we expect the 787 to contribute significantly towards revenue & earnings growth in future years. This would however be subject to solid execution on the company's part to ramp up production of the 787 in order to meet pending orders.
(Chart created by using Trefis' app)
Defense, Space and Security Division (U.S.)
Over 85% of the defense, space and security division revenues come from the US government (as of 2010). The division provides 3 categories of products/services – military aircraft, network & space systems and global services & support. Key customers for this division are various agencies within the US government, such as the department of defense (DoD), National Aeronautics and Space Administration (NASA) and the department of homeland security. As of 2010, Boeing was the second largest US defense contractor after Lockheed Martin.
Increase in Fixed-Price Contracts Can Impact Future Margins
Approximately 55% of revenues from the defense, space and security (DSS) division are generated from fixed price contracts (as of 2010). With a 2009 directive by the Office of Management and Budget to further migrate from cost-based to fixed-price based contracts, we expect the company's DSS division to be subjected to higher risk, as any cost over-runs would directly impact margins under a fixed-price contract (unlike a cost-reimbursement contract, where the contractor is paid for all of its allowed expenses to a set limit plus additional payment to allow for a profit). This trend can significantly impact DSS EBITDA margins in future years.
- Prior to Paris Air Show
Disclosure: No position