Boeing Co.'s (BA) 3 Key Indicators to Follow in 2015

By Markets Fool.com

Boeing investors will be wondering what the stock price has in store for them this year. After a difficult start to the year, the stock has been range-bound roughly between $120 and $135. Can it break out in 2015? To help readers answer this question, I've picked out three of the key indicators of Boeing's operations and end demandto watch this year.

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Boeing's key indicators

  • Production rates on the 737 and 787programs, and how they might impact operating margin at Boeing commercial airplanes
  • New orders for the 777
  • Reduced deferred production costson the 787 program

Boeing'sproduction ramp-up
As ever, Boeing investors will be closely following its orders and deliveriesin 2015.The 737 is likely toremain the workhorse of the company's commercial aviation business (see the order table below), and investors should focus on how Boeing progresses in ramping up production.

On the third-quarter conference call, CEO Jim McNerney outlined Boeing's plan to boost production on the 737 "from the current rate of 42 per month to 47 in 2017 and then increase production again to 52 per month in 2018."

Turning to the 787, McNerney said Boeing was aiming for "production rate increases from today's 10per month to the previously announced rate of 12 per month in 2016 and then up to 14 by the end of the decade."

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As the table below demonstrates, the 737 is Boeing's most ordered airplane in recent years, while, as we shall see later, the 787 program is subject to concern about its production costs.

Conveniently, Boeing publishes data on current-year deliverieson its website. Along with the delivery numbers,investors should also follow the impacton operating margin of boosting production rates.

Boeing's order book and why the 777 matters
The following table of Boeing's historical net orders demonstrates the importance of the 737 and, increasingly, the 777 -- the key thing to look for in the order book.

Model

Net Orders (in year of order)

2010

2011

2012

2013

2014

737

Single Aisle, short-mid range

435

578

1,171

1,208

1,104

747

Twin Aisle, mid-long range

1

5

7

17

767

Twin Aisle, mid-long range

3

42

22

2

4

777

Twin Aisle, mid-long range

75

194

75

121

283

787

Twin Aisle, long range

36

45

41

183

41

Total

550

864

1,316

1,531

1,432

Source: Boeing presentations.

However, not all 777s are made equal.The 777 model has a new plane, the 777X, which is scheduled for production beginningin 2017 and first delivery in 2020. Since production of the 777X won't begin for a couple of years, Boeing's challenge is to bridge the gap betweenproduction on the 777 and the777X.

The issue is important, because at the time of this writing, Boeing only has 278 unfulfilled orders for the legacy 777. At the current production rate of around 100a year, Boeing has almostthree years of 777 orders in its backlog. However, the 777X isn't expected to be delivered until 2020 -- leaving the company with a potential gap in deliveries between the 777 and the 777X. In short, Boeing needs new orders on the 777, or it may have to slow production rateson the airplane.

McNerney said on the Q3 conference call: "We expect demand for the 777 to remain healthy through the end of this decade with an anticipated average order capture around 40 to 60 airplanes per year to support the transition to the 777X."

According to Boeing's order data website, sixty-three 777 aircraft were orderedin 2014. The chart below shows the split of 777 and 777X orders in the last few years. Investors should look for Boeing to hit McNerney's guidance for orders on the legacy 777 in 2015.

Version 2012 2013 2014
Boeing 777 75 55 63
Boeing 777X N/A 66 220
Total 75 121 283

Source: Boeing presentations.

(For readers wishing to follow Boeing's progress in this area, data on 777 and 777X orders can be obtained from Boeing's website. Simply create a "user defined report" and choose the 777 in the "select model information" section.)

787 deferred production costs
Boeing's accounting allows it to spread out of costs on the 787 program over time in order to adjust for the huge initial capital investments needed for the new model. Deferred production costs simply represent the difference between the estimated average cost of the program and its current costs. (Readers wanting more information on this can look to this useful article on the subject, from fellow Fool Daniel Ferry.)

On the third quarter conference call, Boeing CFO Greg Smith said the companyincreased its deferred production cost on the 787 in Q3 by "$947 million to $25.2 billion, largely driven by the increase of 787-9 production and the continued inventory pull ahead."

In short, investors should hope for deferred production costs to decline in 2015.A year ago, Smith estimated the program's deferred production cost wouldreach approximately $25 billion beforestarting to coming down.

As noted earlier, the deferred production cost will start to decline when its current costs are lower than the estimated average cost of the program. However, it's already at $25.2 billion, and on the Q3 conference call, management made no firm commitment that it would start to come down from this figure in short order.


Source: Boeing presentations.

The article Boeing Co.'s (BA) 3 Key Indicators to Follow in 2015 originally appeared on Fool.com.

Lee Samaha has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.