Morningstar | Boeing is Ramping up the 737 and 787, While Contemplating an NMA Program Launch
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 737 going to 57 per month in 2019, from around 42 in 2016. Boeing delivered about 806 commercial aircraft in 2018 and targets delivery of 900 aircraft in 2019. 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 driven by the commercial airplane business, should help support 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 higher-margin services business, Boeing stood up a new services division during 2017 and 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 hitting 14.5% in 2019 and landing just over 15% in 2022. 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, the introduction of the higher margin 787-10, and block extensions on the program--should also help margins. Boeing continues to toy with the idea of launching a new next generation midsize aircraft and we think authority to offer may be granted by the board in 2019.The Boeing is an aerospace firm. The company's segments include: Commercial Airplanes, which develops, produces and markets commercial jet aircraft and provides fleet support services, mainly to the commercial airline industry; Defense, Space and Security, which engages in the research, development, production and modification of manned and unmanned military aircraft and weapons systems for strike, surveillance and mobility, vertical lift, and commercial derivative aircraft; Global Services, which provides supply chain and logistics management, pilot and maintenance training systems and services, and data analytics and digital services; and Boeing Capital, which manages overall financing exposure.
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