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Boeing Gets Multi-Billion Contract

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The Boeing Company (BA) announced that it was awarded a $6 billion contract from Shanghai-based airliner, China Eastern Airlines Company, for 20 Boeing 777 aircrafts. In a shrewd move, Boeing will also buy from the airliner five Airbus A340s. The Airbus jets are about 8.3 years old, on average, and were used to fly long-haul routes to New York and Los Angeles. The airliner is swapping the Airbus jets as they have high operating costs. The unaudited book value of the five Airbus jets China Eastern is selling was approximately 4.47 billion yuan ($708 million). They'll be delivered to Boeing in stages from 2014 to 2015. The deal however is pending the approval of the Chinese government.

The new jets will be delivered in stages from 2014 to 2018. The airliner will pay for them using working capital, bank loans and other sources of financing. The 777 is a twin-engine plane designed for long trips. It carries 365 passengers up to 7,930 nautical miles. The 777s will be used to meet increasing demand on international long-haul routes. The Airbus A340-600 is a four-engine plane that can carry about the same number of passengers and travel the same distance as the 777.

Headquartered in Chicago, Boeing Company is a premier jet aircraft manufacturer and one of the largest defense contractors in the U.S. The company’s customers include domestic and foreign airlines, the U.S. Department of Defense (DoD), the Department of Homeland Security, the National Aeronautics and Space Administration (:NASA), other aerospace prime contractors, and certain U.S. government and commercial communications customers.

Boeing enjoys a unique position as the largest aircraft manufacturer in the world in terms of revenues, orders and deliveries, and is one of the largest aerospace and defense contractors in the world. Besides, its revenues are spread across more than 90 countries around the globe.

Recently, Boeing raised its fiscal 2012 earnings per share guidance to a range of $4.15–$4.35 versus its earlier guidance range of $4.05–$4.25. Commercial Airplanes' 2012 deliveries are expected to be between 585 and 600 airplanes and are already sold out. This includes an expected 70 to 85 787 and 747-8 deliveries. Commercial Airplanes' 2012 revenue is expected to be between $47.5 billion and $49.5 billion with operating margins between 8.5% and 9%.

In the near term however we expect deliveries to take a hit, specially the 787 Dreamliner, owing to the April tornado in Wichita, Kansas disrupting production for more than a week at a Spirit AeroSystems Holdings Inc. (SPR) facility there. Spirit AeroSystems is one of the main suppliers to Boeing’s commercial airplanes business, specially the nose section for the 787 Dreamliner and fuselage work on other Boeing airplanes.

However, the threat of defense cutbacks will loom over the company going forward. Overall, Boring expects defense revenue for 2012 to be between $30.0 billion and $30.5 billion with operating margin greater than 9%. 

Boeing currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are maintaining our Neutral recommendation on the stock. This is in sync with other aerospace and defense behemoths like Lockheed Martin Corporation (LMT) and Raytheon Company (RTN).

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