Boeing (BA, Financial), a lead aircraft manufacturer, makes jet aircraft for both commercial and defense needs. The company came out with its annual results early last month which shows the rising trend of its commercial jetliners. Rising air traffic needs higher capacity which in turn is boosting the demand for commercial airplanes.
In the last fiscal, Boeing derived 61% of its revenue from the commercial division. On the other hand, the Chicago based aero major’s defense wing is witnessing hard time since government discretionary spending is falling.
A matter of concern
The vanishing defense division is a matter of concern for the aero major as it gets substantial portion of its revenue from here. In 2011 this division accounted for 47% of the total revenue. This has been falling, and in 2013 defense share in the total revenue of the company reduced to 38%. Total defense spending of the government has been constrained by as much as $490 billion for a ten year period ending 2021, which is having an impact on the defense segment of the aircraft maker.
Additionally the company’s defense arm is facing immense competition from Lockheed Martin’s (LMT, Financial) F-35. Will all this impact the results of Boeing? Or will something else act as a savior to the company’s performance? Let’s assess.
A closer look
Investors have been a bit worried about the company’s defense segment and the overall reducing operating margin. However if a closer look is taken at the results, to one’s surprise we would discover that the shrink in the overall profitability of the company is not attributable to the defense segment.
In fact the operating profit margin has remained pretty healthy. It jumped 30 basis points from last year to 9.7%. So now the question that strikes the mind is what is eating away the margins?
The company’s cost related to defined benefit pension plan has shot drastically. Its discretionary contributions towards pension plans have been phenomenally high in the last couple of years in comparison to the amount it spent in 2011. Pension contributions for the years 2012 and 2013 were $1.6 billion and $1.5 billion, while in 2011 it was much lower at $0.5 billion.
However, these reasons are too minor for the fundamentally strong Boeing. Investors do have reasons to stay positive on the company stocks.
Encouraging development in the commercial space
Boeing is one of the two major makers of commercial aircraft with solid foothold both in domestic and international market, its chief competitor being Airbus (EADSY, Financial). The European giant held 53% of the market share last year.
Boeing might be challenged by Airbus, but the former’s international market exposure is stronger. The contribution of Boeing’s commercial segment is expected to increase in the coming years, which is good news for the aerospace company. The company expects air traffic to grow at the rate of 5% annually in the next 20 years. This would need higher seating capacity. Airlines would have to increase their orders for jetliners to satisfy the growing traffic, and both Boeing and Airbus would benefit from the same.
Boeing already has a backlog that is equivalent to eight years of production. It’s contractual backlog for 2013 totaled $423 billion. The company’s narrow body 737 aircraft is its best selling jet, which saw massive deliveries of 440 units last year. Other wider body aircrafts such as 777 and 787 also saw their highest sales ever.
What’s in it for you?
Investors could relax a bit and stay positive on Boeing. I believe that the company’s commercial segment has huge upside potential. Moreover, its foray into the new business idea of secured Black phones speaks all about the company’s desire to venture into other relevant areas that would boost growth and maximize shareholders wealth. The lull in the defense segment is just a matter of time. However, the overall prospect of the company remains bright. Boeing should offer your investment a steady fly.
