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We have maintained our Neutral recommendation on The Boeing Company (BA - Analyst Report) on Apr 29, 2013. The company’s solid first quarter 2013 results despite the 787 headwind were commendable. However, risk associated with the axe on the domestic budget keeps us on the sidelines. Boeing currently retains a Zacks Rank #3 (Hold), implying that it is expected to trade in line with the broader market indices.
On Apr 24, Boeing posted stellar first quarter 2013 results, beating the Zacks Consensus Estimate by 17.7% as well as the year-ago profit by 24%. Its strong numbers came from solid operating performance fueled by productivity gains and impressive program execution.
Backlog also increased to a record $392 billion that included $20 billion of net orders during the quarter. The premier jet aircraft manufacturer and one of the largest defense contractors also boosted its profit margins on the back of profitable programs (737 and 777). New plane program announcements for this year and the next (787-10 and 777X) are expected to result in incremental orders in the near term.
In the defense business, revenue and margins continued to be solid in spite of imminent threats of defense budget cuts. Backlog at Defense, Space & Security stood at $68.0 billion, 42% of which comprised of orders from international clients.
Although the threat of defense cutbacks will loom over the company going forward, Boeing foresees defense revenue for the current year to be between $30.5 billion and $31.5 billion with operating margin greater than 9%.
Notably, concerns relating to 787 grounding were finally resolved as Boeing received the approval from the U.S. Federal Aviation Administration (“FAA”) for the 787 Dreamliner’s redesigned battery during the first quarter.
Although the FAA approval came as a relief, margins at the Boeing Capital Corporation (“BCA”) segment will be adversely affected by the resumption of low-margin 787 deliveries.
In fact, in the first quarter, only one 787 was delivered while production of new 787s continued unabated. This resulted in an inventory rise of about $3 billion, thereby reducing cash in the reported quarter.
Again, a large percentage of Boeing’s business is generated within the US, and from government contracts. Budget deficits and political uncertainty make future defense budgets vulnerable to cutbacks. The tepid recovery of the U.S. economy raises fears of further cutbacks in defense budgets, which will affect Boeing’s prospects.
Other Stocks to Consider
There are other stocks in the sector that appear more promising and are worth accumulating now. These include Northrop Grumman Corporation (NOC - Analyst Report), Wesco Aircraft Holdings, Inc. (WAIR - Snapshot Report), and Huntington Ingalls Industries, Inc. (HII - Snapshot Report). While Northrop Grumman and Wesco Aircraft retain a Zacks Rank #2 (Buy), Huntington Ingalls carries a Zacks Rank #1 (Strong Buy).