Boeing: Production Ramp Up, Strong Backlog Should Boost Future Returns

| About: The Boeing (BA)

Shares of Boeing (BA) fell almost 4% over the past week. The aerospace and defense company reported its third quarter results on Wednesday before the market open.

Third Quarter Results

Boeing reported third quarter revenues of $20.0 billion, up 13% on the year. Net income fell 6% to $1.03 billion, or $1.35 per diluted share. Earnings were impacted by a $194 million charge related to higher pensions costs which shaved off $0.18 per share of earnings.

Excluding the increase in pension costs, earnings came in at $1.21 per share, ahead of analysts consensus of $1.12 per share.

New orders worth $24 billion, boosted the order backlog to $378 billion.

CEO and Chairman Jim McNerney commented on the results:

Strong core operating performance drove increased earnings in both our major businesses, along with higher overall revenues, improved cash flow, and solid earnings per share even as pension headwinds rose.


For the full year of 2012, Boeing now anticipates earnings per share to come in between $4.80-$4.95 per share.

Full year revenues are anticipated to come in between $80.5 and $82 billion. Operating cash flows are expected to exceed $5.5 billion for the year.


Boeing ended its third quarter with $11.2 billion in cash and equivalents. The company operates with $11.2 billion in short and long term debt, and essentially operates without net debt.

For the first nine months of 2012, Boeing generated revenues of $59.4 billion. The company net earned $2.92 billion, or $3.86 per diluted share.

The market currently values the firm at $53.6 billion. This values the firm at 0.7 times annual revenues and 14-15 times annual earnings.

Boeing currently pays a quarterly dividend of $0.44 per share, for an annual dividend yield of 2.5%.

Segmental Information

Commercial Airplanes

Revenues from commercial airplanes production rose 28% to $12.2 billion. Boeing delivered 149 planes during the quarter, up 17% on the year. Earnings from operations rose a mere 6% to $1.15 billion given the dilutive impact of 787 and 747-8 deliveries and higher period costs.

Net orders during the quarter totaled 369 planes. The backlog contains 4,100 airplanes valued at $307 billion.

Defense & Security

Revenues for the defense and security division fell 4% to $7.8 billion. Revenues fell in the Boeing Military Aircraft division and the Network & Space Systems. Global Service & Support revenues rose 5% to $2.1 billion. Earnings for the division came in unchanged at $827 million. The backlog of the division came in at $71 billion, roughly two year's worth of revenues.

Investment Thesis

Year to date, shares of Boeing have fallen some 3%. Shares have traded in a relative tight trading range of $67-$77 per share for most of 2012.

Over the past five years shares have lost quarter of their value. Between 2008 and 2012, the company grew its annual revenues from $60.9 billion to an anticipated $80.5-$82 billion for 2012. Earnings rose from $2.7 billion to an anticipated $3.7 billion.

Boeing is trying to ramp up production in order to monetize its huge order backlog. Production plans from 777 planes are scheduled to increase 20% to 8.3 per month, or 100 planes a year. Airliners are screaming to get deliveries of these fuel efficient plans. Production from 737 planes are expected to increase from 35 a month to 38 in the beginning of 2013, and 42 in 2014. Production from 787 planes are expected to double to 10 per month next year.

While the ramp-up of production might boost revenues in the near term, investors have some concerns. Shares of Boeing are down from highs of $100 in 2007, amidst worries about production. Delays in production send shares 30% below levels in 2007, while the backlog continues to grow.

Higher production schedules might have unintended consequences. The production ramp-up is problematic given that not all suppliers might be able to ramp up production as well. Furthermore, higher prices from suppliers and lack of engineers might have a negative impact on margins and earnings.

On the other hand, Boeing is generating a lot of cash flow, exceeding $5.5 billion in 2012. Analysts at Citigroup think that Boeing might increase dividends and/or repurchase its own stock, to boost shareholder returns.

A fair valuation, a strong order backlog and a decent dividend yield should be sufficient reasons for long term returns.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.