Pickup of Hughes Unit Will Help Buffer Commercial Aviation Downturn
When Boeing Co. moved to acquire the satellite operations of Hughes Electronics Corp. this month, it underscored the growing importance of its Seal Beach-based Space and Communications Group.
Commercial aircraft, and to a lesser extent military planes, traditionally have been Boeing’s bread and butter, accounting for the bulk of revenues. But in recent years aircraft construction has been troubled by production problems, declining global demand and intensified competition.
At the same time, satellite-based wireless communications is seen as a growth industry. Thus far, Hughes has been at the cutting edge of developing that technology.
“Space and communications are expected to be the growth engine of the company,” said Jim Albaugh, president of Boeing’s Space and Communications Group. “There will be $113 billion worth of new markets in the next 10 years in space-based communications, both for infrastructure and for services, and neither Boeing nor Hughes would have had, by themselves, the capacity and expertise to enter these successfully.”
The market reacted cautiously on Jan. 13, the day Seattle-based Boeing announced the $3.75 billion acquisition. While shares of El Segundo-based Hughes closed at a 52-week high of $110.50,a 3.5% increase for the day,Boeing shares fell 1.6%, closing at $42.38. Some analysts were concerned that Boeing overpaid for an industry segment that is seen by many as a commodity business.
But Boeing quickly recovered, closing at $47.56 on Jan. 19 after the company announced stronger-than-expected fourth-quarter earnings. For the period ended Dec. 31, net income was $662 million (74 cents per share), compared with $465 million (48 cents) for the like period a year earlier. Revenue was $15.2 billion vs. $17.1 billion.
First Call/Thomson Financial had reported a consensus estimate of 69 cents per share for the fourth quarter.
The quarter capped what turned out to be a strong year. For the 12 months ended Dec. 31, Boeing reported net income of $2.3 billion ($2.49 per share), compared with $1.1 billion ($1.15 per share) the previous year. Revenue was $58 billion vs. $56.2 billion.
In a conference call with analysts, Boeing Chairman and Chief Executive Phil Condit attributed the strong earnings growth to increased production efficiency.
In 1999, space and communications accounted for just 11.8%, or $6.8 billion, of total revenues through programs like the International Space Station, Sea Launch and the Global Positioning System.
But that will change with the acquisition of Hughes. Boeing executives say that in the future, space and communications will bring in 25% of total revenues.
“That’s probably still a conservative estimate,” said Brian Eisenbarth, an analyst with investment bank Collins & Co. “It’s going to take a few years before the market will develop critical mass, but it’s going to be very big. Satellite-based wireless communications will be the premier platform for broadband globally. With the acquisition of Hughes’ satellite business, Boeing stacks up very well against the competition. This is not like the Internet where there are no barriers to entry. It’s an extremely expensive business to be in, and Boeing is a big generator of cash flow.”
Hughes long has been the leading manufacturer of communications satellites, having built 40% of those now in orbit. The company currently has a $4 billion backlog of orders.
The growing market for space-based communications will have to pick up the slack for the commercial airplane business, which could be coping with weak global demand for the next several years, according to Susan Bradley, a spokeswoman for Boeing’s commercial airplanes group in Seattle.
“It’s a cyclical business, and we’re still seeing the impact of the Asian financial crisis,” said Bradley. “The market was driven in recent years by European airlines that rushed to replace their old planes in order to meet environmental standards. Now, we’re looking mainly at Japan to see when the next upturn in the market will occur.”
Boeing expects that overall revenue could drop to $50 billion this year as a result of the soft market for commercial planes, and likely will pick up only slightly in 2001.
At the same time, Boeing faces intense competition from Airbus Industrie, the only other sizable commercial aircraft manufacturer left in the shrinking market. Last year, Boeing delivered a record 620 new airplanes, compared to 294 by Paris-based Airbus. But Airbus chalked up 476 new orders in 1999, compared to 388 for Boeing.
“The acquisition of Hughes and the company’s increased involvement in the satellite industry is going to lessen this whole contest with Airbus that we’ve seen,” said Jeanne Hanley, president of Capital Reflections Inc., an institutional research firm. “It will start to take away the company’s exposure to the ups and downs of the market for commercial airplanes.” n
CORPORATE PROFILE
BOEING CO.
Business: Aerospace
Headquarters: Seattle
OC employees: 13,854
CEO: Phil Condit
Market cap (billions): $44.6
Dividend yield: 1.24%
Total liabilities (billions): $13.7
P/E ratio: 20.09
Long-term debt (billions): $6.0
Year (Dec. 31) 1999 1998
Revenue (billions) $58.0 $56.2
Operating expenses (billions) $54.8 $54.6
Operating income (billions) $3.2 $1.6
Net income (billions) $2.3 $1.1
Earnings per diluted share $2.49 $1.15
