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Stock Strategist

Narrow-Moat Boeing Leaves Troubles on the Ground

The commercial segment can lift sales and operation margins.

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We believe  Boeing's (BA) commercial segment is poised to deliver strong sales and operating margins as production rates increase, major development programs mature, new programs' complexities decline, and productivity measures take hold. The defense segment has proactively rightsized its footprint for the opportunity at hand, and international orders have helped maintain flat revenue results. Its strong positions in the refueling tanker program, fighter aircraft, helicopters, unmanned aircraft, and satellites give us confidence that our forward estimates are reasonable. Furthermore, the clearing of inventory and working capital from the balance sheet will lead to strong cash generation that will flow to shareholders. The company posted record revenue and backlog in 2012, offering strong visibility for years to come. Over the long run, we see strong, sustained returns on capital for Boeing. Its narrow economic moat, which stems from customer relationships, know-how, engineering talent, and incumbency, generates powerful competitive advantages.

Commercial Product Margins to Improve
We see commercial operating margins improving over the coming years even in the face of the dilutive 787 Dreamliner, as Boeing increases production rates and spending on research and development declines. For example, Boeing has reduced floor space on 737 production by 42% over the past decade, even as production rates have increased, leading to higher incremental profitability. We think our assumptions of higher margins are well grounded, as the company has experienced similar improvements in its other platforms.

Neal Dihora does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.