Boeing Flies Above Zacks Consensus - Analyst Blog

Boeing Company (BA) overcame market pessimism, showing resilience in its core businesses with first quarter fiscal 2010 earnings of 70 cents per share, outpacing the Zacks Consensus Estimate of 64 cents. The company, like its defense Goliath peer Lockheed Martin Corporation (LMT), was affected by changes in the health care bill.

Changes in the health care bill eliminated the tax deduction that was previously available for Medicare benefit costs reimbursed. This took away 20 cents from the reported quarterly earnings per share. However, year-ago quarterly results were also affected by a 31-cent charge on commercial airplanes, precipitated by poor market conditions.

The Street was apprehensive of Boeing’s ability to recover since its commercial airplane deliveries were badly affected by cancellation and deferment from customers feeling the after-shocks of the worldwide recession. As a result, Boeing’s quarterly revenue decreased 8% year-over-year to $15.2 billion.

Segmental Results

Commercial Airplane Segment

Boeing’s Commercial Airplane segment in the reported quarter saw a stark 11% drop in deliveries, to 108 units. A lower number of 737 and 777 airplanes flew out of Boeing without a single 747 during the quarter. As a result, Boeing’s quarter revenue dropped 13% to $7.5 billion.

However, showing resilience, the segmental operating margin expanded to 9.1% from 4.9% in the year-ago quarter due to strong operating performance, partially offset by the impact of lower new airplane deliveries. Also, year-ago quarterly operating margins were affected by a charge on the 747 program related to a reduction in twin-aisle production rates and unfavorable delivery price escalation forecasts.

Boeing Defense, Space & Security

Boeing Defense, Space & Security segment witnessed a drop in its quarterly revenue to $7.6 billion. This was due to lower volume in Network & Space Systems, partially offset by favorable aircraft delivery mix and higher volume in services.

Boeing Military Aircraft (BMA) quarterly revenue rose 6% to $3.2 billion on improved delivery mix and volume on F-18 programs. During the quarter, BMA delivered 25 aircraft.

Network & Space Systems’ reported-quarter revenue was $2.3 billion, reduced by expected lower volume in Networked & Tactical Systems and Strategic Missile & Defense Systems.

Global Services & Support (GS&S) revenue increased 4% to $2 billion on higher volume across its broad portfolio of services and logistics products.

Operating margins fell to 8.7% from 9.2% in the year-ago quarter due to lower margins in Military Aircraft and Network & Space Systems sub-segments. This was partially offset by a 4% rise in operating margin of Global Services & Support sub-segment.

Boeing Capital Corporation (BCC)

Boeing Capital Corporation reported quarterly revenues of $162 million compared to $163 million in the year-ago quarter. The segment generated earnings of $46 million compared to $37 million in the year-ago period. During the quarter, BCC's portfolio balance declined to $5.4 billion, down from $5.7 billion at year end, on normal run-off, asset pre-payments and depreciation.

Financial Condition

Boeing ended the quarter with cash and cash equivalents of $4.5 billion and short term investments of $5.9 billion. At year-end fiscal 2009, the company had $9.2 billion in cash and cash equivalents and $2 billion in short-term investments. The company used $285 million cash in operating activities in the reported quarter, compared to $193 million generated in the year-ago quarter. Long-term debt decreased to $11.5 billion at the end of the quarter from $12.2 billion at the end of fiscal 2009.

Outlook

Boeing expects the tide to turn, and reaffirmed its fiscal 2010 revenue in the guidance range of $64 billion – $66 billion. The guidance range is based upon stable operating performance amid lower volumes, higher pension expense and investment in development programs.

Boeing in 2010 expects production rate reductions on the 777 series and Army modernization and missile defense programs. However, faced with health care issues, the company reduced its EPS estimate range for the fiscal to $3.50 – $3.80 from the earlier guidance range of $3.70 – $4.00. Boeing expects to contribute less than $100 million in pension contributions in fiscal 2010. The Zacks Consensus EPS Estimate for fiscal 2010 currently stood at $3.84.

Our View

Boeing is the largest aircraft manufacturer in the world in terms of revenue, orders and deliveries, and the second largest aerospace and defense contractor in the world. Also, its revenue exposure is spread across more than 90 countries around the globe.

Boeing’s Commercial Airplanes business booked 100 gross orders during the reported quarter while 17 others were removed from its order book. This contrasts with the year-ago period when cancellations exceeded 28 gross orders. Contractual backlog remains strong with 3,350 airplanes valued at $250 billion, over seven times the unit's projected 2010 revenue. This, along with a gradual recovery in the commercial aerospace segment, will guide growth in the future.

Boeing is also one of the major players in the Defense business, which accounts for approximately half of its top-line. Therefore, Boeing will continue to benefit from higher Defense spending.

The core Defense budget for fiscal years 2010 and 2011 has outlined a ceiling of $531 billion and $549 billion, respectively, or growth of approximately 4% above the fiscal 2009 budget. Boeing’s Defense business stands out among its peers by virtue of its broadly diversified programs, strong order bookings and order backlog of more than $64 billion at the end of the reported quarter.

However, in the near-term we do not expect any upside since we feel all these positives have been factored in the current market price of the stock. Thus we maintain our near-term market neutral recommendation on the Zacks #3 Rank stock.
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