Following the earnings release of Boeing Company (BA) on April 21, analysts covering the stock have become apprehensive of its near-term prospects and revised downwards their estimates. The market has reacted similarly, and the stock to date has fallen by approximately 16% subsequent to its earnings release.
The Street was apprehensive of Boeing’s ability to recover since its commercial airplane deliveries were badly affected by cancellations and deferment from customers recovering from the aftermath of the worldwide recession.
First Quarter Highlights
Boeing, however, overcame market pessimism and showed 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Changes in the health care bill have rescinded the tax deduction that was previously available for reimbursed Medicare benefit costs. 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.
Boeing’s quarterly revenue decreased 8% year-over-year to $15.2 billion. Of this, 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.
Boeing’s Defense, Space & Security segment also witnessed a 1.4% drop in its quarterly revenue to $7.6 billion. This was due to lower volume in Network & Space Systems, partially offset by a favorable aircraft delivery mix and higher volume in services.
Boeing Capital Corporation (BCC) reported quarterly revenues of $162 million compared to $163 million in the year-ago quarter. During the quarter, BCC’s investment portfolio declined to $5.4 billion from $5.7 billion at year end, on normal run-off, asset pre-payments and depreciation.
(Read our full coverage on this earnings report: Boeing Flies Above Zacks Consensus)
Agreement of Analysts
Boeing following the earnings release witnessed mixed estimate revision trends for the short and the long term. Over the past month, only 3 analysts (out of 22) revised estimates positively for the upcoming quarter, while 2 revised their estimates downward.
For fiscal 2010, all 12 analysts tracking the stock are waiting on the sidelines for any news trigger for revising their estimates. The stock is currently trading at a premium to the peer group and the S&P 500, based on forward earnings estimates.
Magnitude of Estimate Revisions
Boeing has a unique position as the largest aircraft manufacturer in the world in terms of revenue, orders and deliveries, and one of the largest aerospace and defense contractors in the world. Also its revenue exposure is spread across more than 90 countries around the globe. However, in the near term the company is short of stream for growth.
As a result, the magnitude of revisions from the past month resulted in estimates moving south by a cent to $1.04 for the ongoing quarter and by 4 cents for the current fiscal year.
Our Take
Boeing Company is among the best-positioned companies among its peers, due to its balanced exposure to commercial aircraft and defense equipment. Its Commercial Airplanes business booked 100 gross orders during the first quarter. 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. However, in the ongoing quarter, the company expects lower deliveries, which may affect margins. This is a delayed reaction to the changes in aircraft delivery schedules requested by customers in the previous fiscal year.
Going forward, we believe that with the gradual recovery of the global economy, freight and passenger traffic will improve. This will lead to recovery in the commercial aerospace market.
Boeing is also one of the major players in the defense business, which accounts for approximately half of its topline. Boeing’s defense business stands out among its defense peers by virtue of its broadly diversified programs, strong order bookings and order backlog of more than $64.2 billion at first quarter-end 2010.
Also the U.S. defense budgets for fiscal years 2010 and 2011 focus on Boeing’s programs like the F/A-18 fighter jet, P-8A Chinook helicopter, Apache and Osprey rotorcraft, and the brigade combat team modernization program.
Internationally, the company is witnessing strong demand for its defense products like fighter jets, C-17 series transport aircrafts, rotorcraft line up and 737 based military derivatives. The company is also expanding its presence in Cyber Security, intelligence and surveillance and unmanned systems where growth rates are higher than the overall defense budget.
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 Ranked company.
Read the full analyst report on “BA”
Read the full analyst report on “LMT”
Zacks Investment Research
