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Morningstar | BA Updated Star Rating from 01 Oct 2018

Boeing's key opportunity and challenge will be meeting demand in commercial aircraft through production-rate increases, while introducing the new 737 MAX and 777X models. Commercial airplane growth is powered by a backlog of nearly 6,000 aircraft, which will enable Boeing to boost future production, primarily in narrow bodies, with the high-margin 737 going to 57 per month in 2019, from around 42 in 2016. We forecast that Boeing will deliver about 810 commercial aircraft in 2018 and deliver roughly 900 aircraft the following year. The Trump administration's planned defense spending increases, coupled with F/A-18 orders out of the Middle East, have improved the outlook for Boeing's defense unit. Although 2017 revenue shrunk year over year, we anticipate nearly 6% average annual growth over the next five years. This growth, which will be largely driven by the commercial aircraft manufacturing business, should help support operating margins over our forecast period. A T-X trainer win, which is currently up for competition and is worth over $10 billion, could boost the defense unit, and Boeing's recent wins on T-X trainer, MQ-25, and the UH-1N replacement, as well as the initial phase of the GBSD program (the modernization of U.S. land-based nuclear missiles), will drive revenue growth but also dilute margins in the defense unit.Targeting growth in the high-margin services business, Boeing stood up a new services division during 2017 and recently announced the acquisition of KLX, a parts distributor, for $4.25 billion (enterprise value). However, over the medium term, earnings growth will emanate from commercial airplanes, where we forecast margins exceeding 13% by 2019 and reaching 14% in 2021, compared with recent levels in the mid-9% range. The 737 ramp-up and the mix shift to the new 737-MAX drives this expansion. Moderating research and development in commercial airplanes--thanks to the ramp-down in 777X costs plus improved 787 margins, related mostly to supplier pricing step-downs and the introduction of the 787-10--should also help margins, noting that the possible launch of a new midsize aircraft could weigh on profits due to higher R&D spending.