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Analyst Blog

On Aug 12, 2014, we issued an updated research report on the aerospace major The Boeing Co. (BA - Analyst Report). The company’s second-quarter 2014 earnings were above the Street expectation while the top line missed the mark. It reported impressive second quarter earnings as strong commercial margins, large tax settlements and buybacks offset soft revenues and a charge on the KC-46.

A steady improvement in passenger and freight traffic has spurred the demand for Boeing’s commercial airplanes. Its commercial deliveries jumped almost 7.1% year over year in the second quarter 2014. The heightened deliveries were also a function of an increased production rate. During the quarter, the Next Generation 737 model proved yet again its unfailing popularity, delivering 124 airplanes, followed by its 787 model with 30 deliveries.

The company is slated to benefit greatly from improving air traffic which is projected to grow 5% annually over the next two decades. Overall, Boeing anticipates the commercial fleet to double over the next two decades to 42,180 airplanes. About 58% of the demand is likely to come from the emerging markets like Asia, Latin America, the Middle East and Africa, and 42% from the U.S., Europe and Russia.

Boeing is also one of the major players in the defense business. On this front, Long Range Strike (LRS) can offset a certain part of the fighter sales that are at risk. Pentagon plans to invest approximately $3.5 billion per annum in LRS development by the end of the decade, and most likely step up investments once production ramps. The company is also expanding its presence in cyber security, intelligence and surveillance and unmanned systems, where growth rates are higher than the overall defense budget. Internationally, the company is witnessing strong demand for its defense products, such as fighter jets, the rotorcraft line-up and 737-based military derivatives. With a stringent budget environment, rising foreign military sales (FMS) contracts are also more than welcome.

In spite of rising FMS deals, this defense giant continues to face the risk of U.S. defense budget cuts, the uncertain fate of high-cost programs, risks related to key project executions and order cancellations.

In recent times, Boeing’s share price movement also seems to be reflecting lurking fears of a possible shutdown of the U.S. Export-Import Bank (Ex-Im Bank). The company’s many non-U.S. customers finance aircraft purchases through the Ex-Im Bank. The bank’s charter is set to expire on Sep 30, 2014. Boeing would be the prime loser if Washington decides to put the shutters down on the bank, as the company is its single-largest beneficiary, receiving public financing for the sale of aircraft to foreign airlines. The U.S. Ex-Im Bank currently supports approximately 18% of Boeing Commercial Airplanes deliveries.

Zacks Rank & Other Stocks

Boeing carries a Zacks Rank #2 (Buy). Other players worth considering include general Dynamics Corp. (GD - Analyst Report), Lockheed Martin Corp. (LMT - Analyst Report) and Northrop Grumman Corp. (NOC - Analyst Report). All these stocks carry the same Zacks Rank as Boeing.

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