The Boeing Company (NYSE:BA) has had a very strong start to 2019, but as ever investors will want to know what’s coming next. In this context, let’s take a look at three of the most important things investors should expect from the company in 2019.
Production ramp on the 737 & 787 programs
First, Boeing Commercial Airplanes (BCA) expects to deliver 895-905 planes in 2019, and “planned 737 and 787 production rate increases” are assumed as part of the delivery guidance according to CFO Gregory Smith. The company plans to increase the 737 production rate from 52 a month in 2018 to 57 a month in 2019, and the 787 production rate is expected to increase to 14 a month from 12 a month in 2018.
Boeing is expecting some more orders for the 777X. Image source: The Boeing Company.
The production ramps are important not only because selling more planes generates more profit, but also because Boeing tends to reduce the unit cost of production as it increases the rate — meaning that margin could expand as well.
However, it’s not all going to be smooth sailing. Boeing had to deal with well-documented supply chain issues in 2018, and they are likely to continue in 2019. One of the issues is that CFM International (a joint venture between General Electric Company (NYSE:GE) and Safran Aircraft Engines) is behind schedule on the LEAP engine — the sole engine on the 737 MAX.
According to General Electric CFO Jamie Miller, LEAP production is “still behind on deliveries by about 4 weeks, but the business expects to be back on schedule by mid-2019.” This suggests Boeing will still face issues in 2019. Boeing CEO Dennis Muilenburg recently disclosed “we’re doing some additional work with CFM, including deploying some additional Boeing personnel to their factories and to their sub-tier suppliers. So that’s one area that will have some additional focus for us in the first quarter.”
Investors should keep a close eye on what GE’s management says about LEAP production, because it’s key to the 737 production ramp — and this an especially important area of the company’s business, as Boeing plans for the 737 MAX to account for 90% of 737 deliveries in 2019, compared to around half in 2018.
BCA margin expansion
BCA operating margin expanded from 9.4% in 2017 to 13% in 2018, and is forecasted to improve to 14.5%-15% in 2019. That increase comes down to a combination of increased volume, a more favorable mix of production, and productivity improvements. The latter is extremely important, because margin improvements that come from productivity increases might be more sticky in the event of a slowdown in end demand.
With BCA looking set to achieve its target of 15% margin in 2019, Muilenburg was asked whether he would be issuing a new target. He wasn’t drawn to give a specific figure, but argued that the company is “looking for…continued year-over-year margin and cash flow growth.”
All told, don’t be surprised if Boeing gives an upgraded target for BCA margin at some point in 2019. This could lead analysts to upgrade long-term earnings and cash flow forecasts.
Time for more 777X orders?
Boeing’s management is expecting a pickup in replacement demand for wide-body aircraft beginning at the start of the next decade, and the new 777X aircraft is expected to drive growth. The first delivery of the 777X is expected in 2020, and Boeing already has 326 aircraft on order.
However, there hasn’t been a new order since 20 aircraft were ordered by Singapore Airlines in 2017, and the previous order was for a mere 10 in 2015.
That said, orders should pick up in 2019, not least because, as Muilenburg outlined, the company is “now shifting our teams more and more to 777X opportunities” as opposed to the legacy 777 aircraft. In this context, it’s reasonable to expect some 777X orders in 2019. If so, Boeing stock could see some upside as investors price in a coming recovery in the wide-body aircraft market.
Boeing stock has had a great run in the last three years (up 270%), and it looks like there could be more to come. The plan is simple: Management wants to capitalize on a boom in passenger traffic and airplane orders by ramping production of aircraft while trying to take advantage of its virtual duopoly with Airbus in order to reduce supply costs and expand its own manufacturing footprint. Meanwhile, the investment and growth at Boeing Global Services (BGS) is part of a conscious effort to make its earnings less cyclical.
Putting all this together, there’s a strong case for arguing that Boeing’s stock deserves a positive rating: Its business is becoming less cyclical thanks to an improved outlook for airline profitability, and its margin levels are expanding.