On Wednesday, aerospace giant Boeing (click ticker for report: ) reported strong fourth-quarter results. We’re holding steady with our fair value estimate, despite the constant flow of negative news about the 787 Dreamliner.
Boeing’s total revenue advanced 14% in the period, though modest operating margin contraction led to a slightly lower pace of core operating earnings growth, which came in at 9% (on a non-GAAP basis). Operating cash flow surged 42% as the company continues to better handle inventories related to the 787 Dreamliner. However, the firm’s revolutionary plane currently remains grounded due to a series of battery problems, and its decision not to slow production could begin to pressure cash flow again to a degree. Still, we remain confident that Boeing will work successfully with the FAA to resolve the outstanding issues. And while such re-work may be costly for the aerospace giant, Boeing’s problems usually translate into mere timing issues for key suppliers in the supply chain (and are far from tragic). We continue to hold aerospace suppliers Precision Castparts (click ticker for report: ), Astronics (click ticker for report: ), and EDAC Tech (click ticker for report: ) in the portfolio of our Best Ideas Newsletter.
By far, the most important metric to our thesis on the aerospace supply chain is the backlog of unfulfilled orders at the airframe makers, which for Boeing reached $390 billion at the end of the year (after a flurry of $114 billion in orders during 2012). In the fourth quarter, the company booked 394 net orders alone, driving the tally of airplanes in backlog to nearly 4,400. For an insightful comparison, Boeing expects to deliver as many as 645 planes for all of 2013 (including 60 787 deliveries), so the size of its backlog (roughly 7 times annual expected deliveries) not only provides excellent visibility but also offers a substantial cushion in the face of any global economic event. We think this provides considerable support for the commercial aerospace supply chain, which is why we continue to be overweight the industry in our Best Ideas portfolio.
All things considered, the long-term demand for commercial aerospace deliveries is robust, and while ongoing hiccups with respect to Boeing’s 787 Dreamliner should be expected, we remain confident in our industry thesis.