Has Boeing Reached Cruising Altitude?

Boeing

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Boeing Co. (NYSE:BA) closed Tuesday at $122.48 per share but climbed as much as 5 percent in early trading on Wednesday after reporting third-quarter results that came in ahead of expectations. Revenues increased 11 percent on the year to $22.13 billion, beating the mean analyst estimate of $21.66 billion. Adjusted earnings increased 16 percent on the year to $1.80 per share, beating the mean analyst estimate of $1.54 per share.

Boeing has done nothing less than impress the pants off investors this year. Through Tuesday, shares were up nearly 59 percent year to date and have been hitting fresh 52-week highs pretty much every day for the past week. Boeing’s success comes despite a long series of technical mishaps with its flagship 787 Dreamliner and, perhaps more importantly, despite a reduction in government spending, which has taken a bite out of Boeing’s defense business.

To borrow a tired metaphor, aircraft take off into the headwind, and Boeing stock has traced a relatively smooth path from the $70-to-$75 range it was stuck in for most of 2012 to fresh all-time highs.

“Consistently strong operating performance is driving higher earnings, revenue and cash flow as we deliver on our record backlog and return increased value to shareholders,” Boeing Chairman, President, and CEO Jim McNerney said in the earnings release. “During the quarter, Commercial Airplanes completed the first flight of the 787-9 and delivered 170 airplanes, while Defense, Space & Security maintained solid performance and captured $7 billion in new orders.”

Commercial airplane deliveries increased 14 percent on the year to the 170 McNerney cited, driving a 15 percent increase in segment revenues to $13.99 billion, or around 63 percent of total revenues. Earnings from commercial airplane operations increased 40 percent on the year to $1.62 billion, about 76 percent of total adjusted operating earnings of $2.14 billion. Operating margins within the segment increased 2.1 percentage points to 11.6 percent.

Defense, Space & Security segment revenues climbed 3 percent on the year to $8 billion. The increase was led by 10 percent growth in Global Services & Support revenue to $2.2 billion and a 9 percent increase in Network & Space System revenue to $2.2 billion, partially offset by a 5 percent decline in Military Aircraft revenue to $3.5 billion.

Total segment earnings from operations fell 19 percent on the year to $673 million, led by a 48 percent decline in earnings from Military Aircraft. Margins shrank 2.1 percentage points to 8.4 percent. Year-to-date earnings are down 2 percent, though, on flat revenues and just a fractional margin reduction.

Boeing has experienced tremendous growth this year, but the challenge moving forward will be whether the company can maintain the momentum.

“Despite the uncertainty of the U.S. defense market, overall our customer-focused business strategies and disciplined execution on our programs are producing the results we expect, and our strong year-to-date performance and positive outlook allow us to increase our 2013 guidance for earnings and operating cash flow,” McNerney said.

Looking forward, Boeing raised its full-year earnings guidance from a range of $6.20 to $6.40 per share to between $6.50 and $6.65 per share. Revenue guidance is unchanged in a range between $83 billion and $86 billion, and operating margins are expected to climb 0.5 percentage points.

The guidance is generally on the high side of what analysts are predicting, meaning that there could be more upside surprises in the future. However, at about $129 per share, Boeing stock is pushing against the mean analyst price target of $130 (the median price target is also $130), suggesting that the rally could run out of steam in the coming quarter.

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