The run in commercial aerospace is on, and both Boeing (NYSE:BA) and EADS' Airbus will be spending the next few years delivering on an incredible backlog of commercial aviation orders. While there is still some reason to worry about the quality of the emerging market order book, Boeing has a rare opportunity to book several banner years of revenue and cash flow.
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2012 Off to a Good Start
Boeing did everything asked of it and a little more this quarter. Revenue jumped 30% to over $19 billion, handily beating the average analyst guess. Commercial revenue jumped 54%, which was a little bit better than expected, while defense revenue rose 8% and beat expectations in large part because of earlier recognition on a Saudi F-15 contract.
One of the worries around Boeing is whether they can reap attractive margins during this dramatic upswing in aircraft production, particularly with the new 787.
So far, so good. Operating income jumped and beat expectations across the board. Overall operating income rose 57%, with commercial aircraft operating income more than doubling and defense income rising 11%. Boeing exited the quarter with almost 10% operating margin in the commercial aerospace business.
SEE: Understanding The Income Statement
Orders - the Good, the Bad, the Doubts
Boeing delivered 137 planes this quarter, about one-third more than a year ago, and five of the new 787s. Boeing continues to log excellent book-to-bills, though, as the company saw 412 net new plane orders. That brings the backlog to over 4,000 commercial aircraft worth over $300 billion.
That all sounds great, and there's a pretty good chance that the company will log a book-to-bill of 2.0 or better this year. Moreover, given that Boeing shares often track orders, that's a solid outlook for the stock.
Now for the bad news. Less than half of company's backlog is in North America and Europe. That fits in with the torrid growth of emerging market airlines like GOL Linhas (NYSE:GOL), TAM (NYSE:TAM), and China Eastern (NYSE:CEA), but it does raise some risks. Indian airlines like IndiGo and Kingfisher (big Airbus customers) have been struggling recently, and veteran investors probably can recall just how fast emerging markets can turn south on external economic shocks. This doesn't mean that investors should sell Boeing, but it does mean that this is not a risk-free trade.
Go For the Planes or the Parts?
Boeing is not the only growth play in aerospace right now. Textron (NYSE:TXT) and General Dynamics (NYSE:GD) should both stand to gain from improving business jet markets, and Embraer (NYSE:ERJ) is in good shape to continue growing its share of the regional jet market.
That said, investors should take a look at parts and components companies like Rockwell Collins (NYSE:COL) and United Technologies (NYSE:UTX) - the latter of which has sold off on some worries about share loss in the Otis business and competition from General Electric (NYSE:GE) in the commercial engine market.
The Bottom Line
Assuming that Boeing can look forward to a three-year boom, these shares still look pretty interesting. Declines in defense may pressure earnings somewhat, but Boeing should be capable of mid-single-digit free cash flow growth over the next decade. If they can deliver that sort of growth, and over $9 billion of free cash flow in 2021, these shares should trade in the triple digits.
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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.