Friday, January 6, 2012

Boeing: Full Year 2011 Orders Reflect Strength of 777 and 737 MAX, while Deliveries Reflect Continued Issues with 787 Re-work, says Wedbush

Posted by- Neelam Mathews
Jan 6, 2012

The final 2011 delivery totals for the 787 and the 747-8 are disappointing, but not unexpected. It is clear that the final re-work on the 787s is taking longer than expected, says Wedbush.

Boeing was able to delivery a total of just three 787s and nine 747-8s, for a total of 12 as compared to the October guidance of 15-20 (~6 787s and 12 747-8s). “We continue to believe the 787 deliveries will be un-even through most of 2012, but the focus for investors is the 787 production ramp. We continue to believe that the step up to 3.5/month in April should not be an issue, but the step up to 5 expected in 4Q 12 is the primary challenge for Boeing and its supply chain.

“For 787 deliveries, the company attributes the delays to both customer issues and one-time items, and does not believe there are any systemic issues. If this is true, we would expect to see a gradual increase in 787 delivers in 2012, where we currently model approximately 55 787 deliveries.”

The report says:

Boeing’s total full year delivery total was 477 aircraft, just off the 480 guidance. The lower than expected number was due to the smaller number of 787 deliveries relative to expectations. Boeing averaged 31 737s a month, and just 6 777s a month, which is basically in line with expectations for the full year. However, we were slightly disappointed in the lower than expected 737 delivery number for 4Q 11.

Boeing booked 805 net orders for the full year, well ahead of our expectations of ~500 at the beginning of the year. We expected a book-to-bill for the year of greater than 1, but the strength of the order book was much greater than we anticipated. Specifically, the 777, with 200 net orders, and the 737 with 551 net orders (very strong 737 MAX orders in 2H 11) were impressive. The 777-300ER has been given a new lease on life due to the Airbus’ engine mis-step on the A350- 1000, which has resulted in a loss of credibility in the the marketplace. We expect the 777 to see continued strength until there is better clarity on the A350-900 and -1000 in terms of first delivery timing and final performance ability.

Boeing also booked a positive net 13 orders for the 787. Considering the delays on the program, we view this as a positive. We continue to believe there is substantial pent-up demand for the 787 that will start to translate into orders once the company is able to demonstrate some consistency to its delivery schedule. For 2012, we believe the 737 MAX, the 777, and the 787 will lead Boeing to a book-to-bill of over 1, a metric that has historically been a very strong positive indicator for BA stock. The total backlog stands at 3,771 aircraft, approximately 6-7 years of annual output at current production levels.

We continue to believe the primary risk facing Boeing stock is the ability of the supply chain to support the expected production rate increases across the Boeing commercial product line. This risk is centered on the 787, as we believe from our conversations with suppliers that there is little concern currently with their ability to hit the increased 737 and 777 rates considering the long lead times that Boeing has provided.

We continue to believe that Boeing stock will outperform, based on a continued strong order book heading into 2012, improving cash flows and historical outperformance in election years and around new aircraft programs.

Risks to the attainment of our price target include: interest rates, higher energy costs, demand for air travel and the financial health of the airlines, geopolitical security, defense spending, cargo shipments and trade, regulatory changes, pension obligations, supply chain management, technology development, and new product offerings and roll-outs.

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