Revealing its fourth quarter results for 2014, Boeing (BA, Financial) reported a 3% growth over the year-ago quarter to a record $24.5 billion, beating the analyst consensus of $23.9 billion. While the company’s net income increased by 28% to $2.3 billion ($2.31 in terms of earnings per share), it posted an earnings per share of $2.02, exclusive of one-time offerings, reflecting a 25% year-on-year growth. With the company reporting a 15% revenue growth from orders for commercial aircrafts, the aerospace and defence giant is seemingly immune to the declining demand for commercial airplanes, as highlighted in the Durable Goods Report released in December. Consequently, Boeing Co. shares are taking off in the stock markets.
Conversion of jetliner orders key to success
Chicago-based Boeing Company closed out 2014 at $129.98, for a 2.6% loss, including its dividend adjustments. The company is however in the sixth year of its bull run, with a 7.5% gain in the Dow Jones Industrial Average (DJIA) and an 11.4% rise in the S&P 500 Index. Boeing grew its revenue 5% to $90.8 billion on a full-year basis in 2014, with its full-year net income growing 12% to $8.9 billion. Consequently, the company posted full-year earnings of $8.60 per share.
The key to Boeing’s robust fourth quarter results that ensured a fifth successive year of growth in core operating earnings lies in the company’s response to strong market demand with its established capabilities combined with effective product delivery. While the company’s Commercial Airplanes segment successfully grew its production rates and delivered an industry record of aircrafts in 2014, its Defense, Space & Security division also traversed a demanding market environment to win major new contracts and realize strong revenue.
In 2014, Boeing Co. delivered a total of 723 commercial jets, beating Airbus Group NV (EADSY, Financial) to the title of the biggest plane manufacturer of the year. Among the company’s deliverables were 485 of its 737 passenger jets and 114 787-Dreamliners, taking the overall number to the best ever posted by the company. Boeing also took 1,432 orders valued at a net $232.7 billion (at list prices) for commercial airplanes in 2014, with 432 orders coming from the last quarter, pushing the company’s backlog to a record 5,789.
The delayed market entry of the 787 Dreamliner, the first of its kind to be built of composites instead of aluminum, resulted in a $26.1 billion rise in production costs of the jetliner in the fourth quarter. However, Boeing, which expects the 787 to be the single largest driver of added free cash flow, is keen to make progress on the jetliner’s overall cost and foresees a drop in the accounting measure as assembly expenditure slides in the midst of a projected growth in efficiency.
On the back of a high delivery volume, the company’s fourth quarter revenue from Commercial Airplanes grew 15% to $16.8 billion, while the operating margin was 9.3%. Concurrently, Boeing’s revenue for the fourth quarter from the Defense, Space & Security (DS&S) segment was $7.6 billion with a 12.1% operating margin. However, results in the DS&S segment were not as robust, with a 14% revenue drop in the last quarter and a 7% sales drop in sales during all of 2014 due, partly due to a reduced number of planned deliveries of C-17 and F-15 jets. The segment also posted a $62 billion backlog, with around 36% of the figure representing orders placed by international customers.
Outlook for 2015
While Boeing’s profit in 2014 was $8.60 per share, the company expects its full-year core earnings in 2015, excluding certain pension expenses, to be in the range of $8.20-8.40 per share, with the full-year revenue projected in the range of $94.5-96.5 billion. The company also expects an operating cash flow of over $9 billion. However, although the company’s sales growth in 2015 is projected to be almost the same as 2014 at 4%, growth in earnings per share is likely to be just 3% compared to 18% in 2014.
While the company is still struggling with the 787 deliveries, Boeing expects to see an enduring wave of orders for the 737 and 777 coming in with higher margins, apart from large orders coming in for the defence and space segments in the upcoming years. With the company predicting a high conversion rate for its backlog of jetliner orders in 2015, investors, who have been waiting to see the company generate more cash from new orders while stemming losses on the 787 Dreamliner, should be in for a good run. However, the company will have to ensure that its production is in line with sales.
Our take
Although skeptics worry about the company’s history of setting and then outperforming its conservative financial targets, market experts rate Boeing’s shares as a strong buy, expecting the shares to fly in the range of $165-175. Boeing, with a market cap of $93 billion, has a projected price-to-earnings ratio of 15% for 2015.
