We maintain our Neutral stance on the defense behemoth The Boeing Co. (BA - Analyst Report). Boeing’s future prospects to a large extent depends on the defense budget, as a major chunk of its revenue comes from government contracts. The European crisis and rising possibility of U.S Defense cutback will impact the order book and eventually slow down the growth trajectory of the company.
Numbering among the positives for the company is its strong presence in the international commercial airline markets, which will allow the company to capitalize on the potential growth in the commercial space. Boeing also caters to international customers and allies with international partners to increase efficiency through exchange of technology. Its strong balance sheet and consistent cash flows provide it the with the necessary financial support to increase shareholder value and make strategic acquisitions.
Despite upbeat sales in commercial aircraft, headwinds in 2012 include rising cost of fuel and a lingering weak economy, particularly in Europe. The view is endorsed by International Air Transport Association (IATA), which estimates that profitability of commercial airline operators will take a beating in 2012 compared to the prior two years.
Boeing generates 60% of its defense revenue from fixed price contracts. These contracts always have a risk of margin erosion or losses due to escalation in costs. Moreover, rising competition and delay in development and delivery of commercial airplanes would affect future profitability. Boeing delivered its first 787 after a delay of more than three years, which resulted in a few order cancellations.
Chicago-based Boeing Co. has a Zacks #3 Rank, which translates into a short-term Hold rating. The company competes with the likes of General Dynamics Corp. (GD - Analyst Report), Lockheed Martin Corporation (LMT - Analyst Report) and Northrop Grumman Corporation (NOC - Analyst Report) in various niches.