On Wednesday, aerospace giant Boeing (click ticker for report: ) reported excellent third-quarter results that showed solid backlog trends and improving cash flow. We continue to think aerospace is one the strongest sectors in the global economy, boasting significant visibility as a result of the tremendous backlogs of the airframe makers. We do not expect to make a change to our fair value estimate of Boeing at this time.
Boeing’s revenue advanced 13% during the period thanks to commercial airplane sales, which jumped 28% on higher delivery volume. Operating earnings rose roughly 6% in its commercial business, while defense earnings were roughly flat from the year-ago period. Excluding pension expense, earnings per share advanced 5% during the quarter. We continue to expect the pace of deliveries to increase in coming years as Boeing works through its multi-year backlog that stands at approximately 4,100 planes valued over $300 billion (that’s about 6 times this year’s expected commercial revenue!). Commercial order trends were also solid, with the company reaping $24 billion in new business during the quarter. Through mid-October, the company has already collected 929 commercial aircraft orders (see graphic at end of article), more than 50% higher than the roughly 600 deliveries it is targeting during 2012.
Defense revenue faced pressure in the quarter, falling 4% from the same period a year ago. Though revenue in all three underlying divisions within its defense revenue stream dropped, network and space systems fared the worst due primarily to lower volume on the Brigade Combat Team Modernization program. We’re not expecting much from Boeing’s defense business in coming years, as shifting budget priorities will certainly impact the aerospace giant and its peers: Lockheed (click ticker for report: ), Northrop Grumman (click ticker for report: ), Raytheon (click ticker for report: ), and General Dynamics (click ticker for report: ). Still, we prefer Boeing relative to its defense contracting peers as commercial aerospace revenue is not tied to uncertain government spending and will become an increasingly larger part of its mix going forward (particularly as the commercial delivery upswing ensues). However, we do note the dividend strength of the large defense contractors, as measured by their Valuentum Dividend Cushion scores.
Looking ahead, Boeing raised its 2012 revenue guidance to the range of $80.5-$82 billion (was $79.5-$81.5 billion) and its earnings per share outlook to the range of $4.80-$4.95 (was $4.40-$4.60) for the year. The company noted that operating cash flow is now expected to be greater than $5.5 billion, up from greater than $5 billion previously. Cash flow had previously been weighed down by massive inventory build of the 787 Dreamliner, and we’re pleased to see this trend reversing as deliveries of the plane ramp up (the firm delivered 12 Dreamliners during the period versus just 1 in last year’s quarter). Free cash flow for the year should also be robust, as Boeing reduced its capital spending target.
All things considered, Boeing posted a very solid quarter, and its outlook supports our thesis on the aerospace sector, even though commercial order trends at GE (click ticker for report: ) and United Technologies (click ticker for report: ) weren’t as strong as we would have liked. We continue to prefer firms in the aerospace supply chain—EDAC Tech (click ticker for report: ), Precision Castparts (click ticker for report: ) and Astronics (click ticker for report: )—and hold all three in the portfolio of our Best Ideas Newsletter.
Image Source: Boeing’s website, October 24, 2012