By Siri Bulusu
Despite disappointing 2016 outlook estimates and cuts to defense spending, the majority of analysts remain optimistic about the future of Boeing Co. due to the company’s substantial order backlog and new aircraft demand from emerging markets.
Following a jarring fourth-quarter earnings release in late January, the Chicago-based aerospace giant’s shares fell a whopping 10.5 percent to $116.58. Against a meager recovery over the past month, shares hit a new low Wednesday at $116.36.
Consensus estimates place Boeing’s 12-month target at $147.16. Earnings-per-share estimates for 2016 are $8.49, according to analysts surveyed by Yahoo Finance, up from $7.72 in 2015.
Boeing’s share prices May 2015 – Jan. 2016
Boeing’s January earnings release revealed that the company expected 2016 revenue to peak at $95 billion, well below Yahoo analyst expectations of $97.17 billion.
Nonetheless, 15 out of 25 analysts surveyed by Bloomberg rate Boeing stock buy, while eight say hold and two sell.
“We still see value due to the company’s massive commercial aircraft backlog, its profitable defense business, and managements focus on returning capital to shareholders,” Morningstar analyst Chris Higgins said in an online statement.
Fourth quarter revenues exceeded expectations, but the company spooked investors by disclosing a $884 million pretax charge that accounted for slowing the 747-8 production rate to 0.5 planes per month, due to the weak cargo market.
“We believe the positive industry outlook is balanced by the reduced delivery forecast with the transition to new models and a sluggish cargo market,” said Jeff Windau, senior equity analyst for Edward Jones, in an e-mail. “Overall, we believe Boeing’s growth prospects are appropriately reflected in the shares.”
According to Randy Tinseth, vice president of marketing for Boeing Commercial, in 2015 Boeing saw a record number of 762 deliveries and grew its backlog to 5,800 airplanes, which will satisfy eight years of production.
Dennis Muilenburg, president and CEO of Boeing, said in the third-quarter conference call that the backlog, valued at $432 billion, is an opportunity to generate “long-term cash growth and long-term margin accretion.”
Muilenburg asserted that “productivity actions” will result in increased returns to shareholders and allow Boeing to invest in longer term targets.
“There are some long-term drivers for airplane demand, with fuel efficiency being one,” Windau said in an e-mail. “Although fuel prices have dropped significantly, airlines are still replacing older aircraft to improve their fleet’s efficiency.”
Windau called it “an attractive time for airlines to make purchases given their cash generation and the attractive financing environment.”
While the company anticipated slowed deliveries in the near-term, estimating a maximum 745 commercial plane deliveries in 2016, some analysts believe commercial demands to remain strong citing China Southern Airlines’ purchase of 80 737-jets in December 2015.
“Demand for Boeing’s commercial airplanes is on the rise due to a steady improvement in passenger and freight traffic on the back of a recovering global economy,” said a Zacks Investment Management statement.
Zacks views global demand as a positive indicator, but also a potential risk factor as Boeing’s revenue stream from sale of commercial airlines depends on the “financial health” of a “handful of major commercial airlines.”
Moreover, cuts in U.S. Department of Defense budgets threaten Boeing’s operating margins: “Budget deficits and political uncertainty make future defense budgets vulnerable to cutbacks,” Zacks stated.
“A tight U.S. fiscal environment will constrain increases in defense spending regardless of which political party is in power,” Higgins stated.
The commercial aircraft business remains the main driver of revenue, as U.S. Defense Department spending fell 16 percent since 2010. Boeing estimates 2016 Defense, Space and Security operating margins to drop to 10 percent, down from 12.4 percent in 2015.
In order to mitigate the “volatile budget picture at home” Boeing created the BDS Development organization to restructure its defense and space business. Zacks states, “The move is expected to enhance product efficiency and lower costs for Boeing’s defense customers in addition to maintaining delivery schedules.”
However, Higgins added, “squeezing inefficiencies out of the defense business will become increasing difficult” for Boeing.