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Boeing’s Commercial Business Shows Strength, Risks Remain

Zacks

On May 18, we issued an updated research report on the largest aircraft manufacturer Boeing Co. BA.

Boeing’s revenue exposure is spread across more than 90 countries around the globe. Demand for its commercial airplanes is on the rise owing to a steady improvement in passenger and freight traffic. Overall, the company anticipates the commercial fleet to double over the next two decades to 45,240 airplanes by the end of 2035, backed by sustained 4.8% annual growth in commercial passenger traffic.

Boeing expects single-aisle jets to be the major driver behind demand growth, comprising 71% of the total projection. The new Boeing 737 MAX 8 and the current 737-800 will be the major growth catalysts. Though deliveries of its single-aisle 737 slipped to 113 in the first quarter from 121 a year ago, as it was busy with the production of a newer version of its most popular plane, the 737 MAX; the company clinched approximately 84% (i.e. 167 units of 198 orders) of the total first quarter orders for 737.

Again, Boeing’s defense business stands out among its peers by virtue of its broadly diversified programs, strong order bookings and order backlog. Moreover, 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. This should help it to register higher top-line growth.

On the flip side, Boeing’s 787 Dreamliner's deferred production cost remains a cause of concern. Although it is witnessing declining deferred costs, it hasn’t been able to completely waive off these costs. Furthermore, production challenges, change incorporation on early build aircraft, schedule delays, customer and supplier impacts, and changes to price escalation factors significantly impact program profitability.

In addition to these woes, Canadian, Russian and Chinese manufacturers will begin delivering airplanes, comparable to Boeing 737, over the next few years. Airbus is also constructing its first U.S. manufacturing plant to target customers in Boeing's territory. Although Boeing has responded positively by offering a re-modeled 737, new competitors may impact the top and bottom line of the company.

Price Movement

Shares of Boeing have gained 35.4% over the last 12 months, outperforming the Zacks categorized Aerospace–Defense industry’s gain of 19.2%. This could be because the company’s strong balance sheet and cash flows provide financial flexibility in matters of incremental dividend, ongoing share repurchases and earnings accretive acquisitions. The aircraft manufacturer also poses strong competition to its peers − General Dynamics Corp. GD, Huntington Ingalls Industries, Inc. HII and Airbus Group SE EADSY.



Zacks Rank

Boeing currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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