By Janel Forte
Boeing Co. looks like it’s going to cruise right into 2015.
The Chicago-based aerospace giant is the beneficiary of a sustained cyclical boom in demand for commercial aircraft. That boom is being driven by a variety of factors, including Boeing’s successful rollout of the high profile 787 Dreamliner and other fuel-efficient planes.
The 787’s huge development costs burdened earlier years’ profits, and the aircraft ran into a variety of embarrassing problems in the early phase of its entry into the market. But those issues are now in the past.
At the same time, Boeing’s customers – airlines around the world – are reaping a big financial windfall as plummeting oil prices reduce their jet-fuel costs. It seems likely that if those trends remain in place, Boeing shares could be well on the way to returning to their 52-week high of just over $144 in the upcoming year.
The biggest wild card for investors? Despite hefty profits and soaring sales, Boeing’s free-cash generation has been lower than expected for a number of quarters, raising concerns.
“Boeing stock is really being driven by the sentiment around the commercial aviation sector,” said Peter Arment, an analyst at Sterne Agee & Leach Inc. “Right now the focus is on how the company will generate cash by delivering these orders and weighing how much of that cash will be returned to shareholders as dividends.”
To date, the aerospace giant has over 5,500 aircraft on backlog, and that number is projected to increase going into the new year. The reassurance that the 787 Dreamliner has overcome the snafu of its faulty batteries and other issues, coupled with the company’s revamped version of its 777X wide-body and a new iteration of the ever-popular 737 have garnered the company 1,170 orders in 2014 alone.
“Our current backlog is a record for our company’s history and we’re very proud of it,” said Doug Holder, Boeing’s media relation’s contact. “It’s strong, diverse and healthy and we’re working to increase our production to meet the demand for our products.”
Boeing posted strong-than-expected earnings in the most recent quarter, toppling analyst projections, but its cash flow disappointed Wall Street analysts and initially weighed down the company’s shares.
“The cash flow stuff is problematic,” said Morningstar analyst Neal Dihora in regards to Boeing’s reported 86 percent decline in free cash flow to $317 million from $2.32 billion in the year-ago quarter. “Right now, they’re boggled up by inventory with their extensive backlog — but when will growth and sales ever really mean anything to their bottom line?”
Developing a new aircraft, or re-engineering an existing model, is necessary as Boeing fights for market share with arch-rival Airbus of Europe. But it’s also a costly, long-term undertaking that drains cash until the process is done and the new versions enter the marketplace.
“Boeing has lots of different aircraft at different points of production,” Dihora said. “At some point if you cant make sales into cash, that’s when investors get wary.”
Its guidance for the year was 715 to 725 orders delivered. As of now, the airplane manufacturer delivered 647 aircraft. This may seem a bit of a stretch to finish by the end of 2014, but according to Holder, Boeing is on track to meet its expected deliveries.
“We have an active sales campaign and are working to get airplanes in the hands of our costumers as quickly as possible,” he said.
Boeing’s defense sector has traditionally served as a more stable revenue source than the highly cyclical commercial jet sector. Defense makes up about 40 percent of the parent’s total revenue, accounting for $33 billion of Boeings $86.6 billion in total revenue last year.
However, Boeing’s Defense, Space & Security has suffered setbacks. It lost out to defense rival Lockheed Martin several years ago in a competition to build the Pentagon’s next-generation F-35 fighter jet, and orders for Boeing’s long-lucrative EA-18 “Growler” fighters are declining as Lockheed ramps up production of the F-35. What’s more, Uncle Sam will be buying fewer defense items of all kinds as budget cuts kick in.
“The defense sector is challenging and for Boeing a flat to down business with the commercial sector taking the lead,” said JB Groh, an analyst at DA Davidson & Co. “Now the driving factor for the stock is whether the commercial side can raise revenue and earnings per share.”