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By William Patalon III
Money Morning/The Money Map Report
Just one day after arch-rival Airbus SAS was forced to raise prices because of a weak dollar, The Boeing Co. (BA) said yesterday (Wednesday) that its first-quarter profits soared 38%, easily eclipsing Wall Street expectations.
Shares of the world's No. 2 commercial jetliner-maker soared $3.53 each, or 4.49%, to close at $82.09 because of Boeing's record backlog and a bullish outlook for next year. Earlier yesterday the shares touched $83.36, the biggest increase since June 2006.
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Investors had pushed the stock down 15% in the quarter over worries about delays in the "Dreamliner" jetliner program, and the surprise loss of a $35 billion U.S. Air Force tanker contract to a team that included Airbus and U.S. defense contractor Northrop Grumman Corp. (NOC).
Boeing is one of the companies that Money Morning has written about repeatedly, having identified it as a so-called "Global Titan" – a company that's positioned to capitalize on worldwide trends and that derives the bulk of its sales and profits from such fast-growing overseas markets as China. Jetliner deliveries rose 8.5% last quarter, with almost two-thirds getting delivered overseas.
Profit from continuing operations rose to $1.21 billion, or $1.61 a share, from $873 million, or $1.12, a year earlier, the Chicago-based Boeing reported. Sales advanced 4.1% to reach $16 billion. The results beat the average estimate of $1.35 per share, according to a survey of 20 analysts conducted by Bloomberg News.
Profit for 2009 will be $6.80 to $7 a share on sales of as much as $73 billion, Boeing said in its first forecast for 2009. That projection also exceeded expectations: Analysts had predicted that profits would increase from about $5.93 a share this year to $6.87 next year – even after about a dozen estimates had been slashed after Boeing announced another delay in its 787 Dreamliner program, the third time the airliner maker has pushed back the scheduled first flight for the high-tech commercial jetliner. But the company announced a record backlog.
"We are encouraged that they added to the backlog in the first quarter," Eric Marshall, research director at the Dallas-based Hodges Capital Management, said in a Bloomberg Television interview. Delays to the 787 Dreamliner program, which dragged down Boeing's stock price this year, have "created an attractive opportunity for long-term investors. We think the stock could go back above $100 over the next year," which is why Hodges is adding to its Boeing position of 330,000 shares.
From yesterday's close, a move to $100 would represent a return of 22%. And that doesn't include income from Boeing's current dividend yield of 1.95%.
Weak Greenback Stings Airbus
With a decline in the greenback of nearly 9% so far this year, Boeing has gained an advantage over its bureaucratic European rival, Airbus. Most of Airbus' costs are euro-denominated, while Boeing's sales are conducted chiefly in dollars.
Airbus, currently the world's biggest maker of commercial aircraft, said it's raising the price of its planes in response to the dollar's decline against the euro, and to offset an escalation in metal prices fueled by the ongoing global commodities boom.
The list price of the single-aisle Airbus A320-series jet will rise by an average of $2 million as of May 1, while twin-aisle airliners will typically cost $4 million more, the Toulouse, France-based Airbus said Tuesday.
"The price increase is mainly triggered by the weak U.S. currency and the overall increase of the world's raw-material prices, especially with regards to metal," Airbus said.
The falling dollar hurts earnings at both Airbus and its parent company, European Aeronautic, Defence & Space Co., when revenue from dollar-denominated aircraft sales is "translated" into, or converted into, European euros.
Metal costs also have crimped profits, as the price of aluminum alone has soared 28% just this year, due to supplies constrained by rising purchases in China, and shortages of energy needed to make the lightweight metal.
Conversely, a weakening dollar makes foreign purchases of Boeing aircraft cheaper – almost as if the buyers are getting a price cut. But since Boeing doesn't have to convert those dollars into a different currency, the "price break" buyers are getting has no effect on its revenue or profit.
Boeing also is getting a boost as carriers such as Continental Airlines Inc. (CAL) buy more of the U.S. airplane-maker's Boeing 737-class jet to replace older, less fuel-efficient aircraft to reduce the effect of record oil prices. Unfilled commercial orders rose to an unprecedented $271 billion.
Boeing Chief Executive Officer. had held back his annual forecast until yesterday to learn more about delays in the Dreamliner, which is at least 14 months behind schedule and won't enter service until late 2009.
Boeing said that its commercial sales rose 8% to reach $8.16 billion, generating a 39% jump in operating earnings, while Boeing's military business saw sales fall 1.8% to reach $7.58 billion, even as profit increased 10 percent. Boeing is also the second-largest U.S. defense contractor, trailing Lockheed Martin Corp. (LMT).
Boeing said today it expects to deliver 500 to 505 airliners in 2009 – up from as many as 480 this year. Asia is expected to be a major market going forward, as will be China. Consider that:
- The global demand going forward is almost beyond belief. China alone will require 3,400 new airplanes worth about $340 billion over the next 20 years – an average of $17 billion annually. And that doesn't include other Asian markets, such as Vietnam, which will need to modernize their air fleets as they commercialize their commodities.
- The Vietnam deal announced in November is worth $1.9 billion.
- In fact, over the next two decades, Boeing has forecast that air carriers worldwide will need to acquire 28,600 commercial aircraft – with a value of $2.8 trillion.
Boeing spent $1.2 billion last quarter to buy back 15.6 million shares, part of a $7 billion repurchase authorization. Thirteen of 24 analysts in a Bloomberg survey recommend the company's stock; nine say to hold it, and two recommend selling.
Founded in Seattle by timber millionaire William E. Boeing back in 1916, the company got its start building seaplanes and operating a series of air transport services. In 1933, Boeing built the world's first true commercial airliner, the Boeing 247, which was all metal, instead of the conventional wood, fabric and metal construction of that time.
But the company really came to prominence in the late 1930s, in the depths of the Great Depression, when it made a bet-the-company decision to develop a long-range Army Air Corps bomber on spec. The four-engined aircraft was so impressive that an awestruck newspaperman dubbed it the "Flying Fortress." The name stuck. That airplane was the Boeing B-17, a heavy bomber without which most experts say the Allies might never had defeated Germany in World War II.
With the arrival of the jet age in the 1950s, the company risked its own capital to develop what eventually became the Boeing 707, a jetliner that leapfrogged offerings from Great Britain's De Havilland, France's Sud Aviation and Russia's Tupolev – and revolutionized jet airliner travel in the process. A subsequent model, the 737, is the best-selling commercial jet ever. Boeing's double-decked, humpbacked 747 "Jumbo Jet" debuted in the late 1960s, and opened the door to true intercontinental travel.
Since World War II, Boeing has also been a heavyweight in the defense-aerospace sector, building long-range bombers, aerial tankers, missiles, and helicopters, among other weapons systems. The military-contracting business has helped Boeing through periods in which there might have been a lull in the commercial side of the company's business.
News and Related Story Links:
- Bloomberg News:
Boeing Profit Rises 38% on Record Backlog of Orders.
- Bloomberg News:
Airbus to Raise Plane Prices on Dollar Decline, Steel.
- Money Morning Investment Analysis:
China's Growth Will Clear $340 Billion Worth of Airliner Sales for Takeoff Over the Next 20 Years.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.