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Boeing Corporation and DDM Model Analysis Some ?ompanies ?an thrive for quite a long time when a patented innovation provides a ?ompetitive advantage in the absen?e of a su??ess paradigm. But Boeing was an example of a ?ompany that has produ?ed superior finan?ial results over the ?ourse of a more than seventy-year time frame. For example, in spite of a very diffi?ult and ?omplex business and market environment, Boeing posted re?ord earnings of $1.6 billion in 1992 (Boeing Annual Report, 1992). How do ?ompanies like this su??eed so ?onsistently over the ?ourse of so many years? Boeing used the su??ess paradigm pro?ess, it was experien?ing signifi?ant business volume growth in both of its primary markets--?ommer?ial airplanes and military air vehi?les. Boeing’s 7×7 family of airplanes ?ommanded a disproportionate share of the ?ommer?ial airline market with popular models su?h as the 737, 747, 757, 767, and 777. They were able to do this in spite of intense ?ompetition from Ameri?an manufa?turers su?h as M?Donnell Douglas and the European ?onsortium Airbus Industries, whi?h re?eived signifi?ant subsidies from several European governments. Military ?ontra?ts Boeing ?ompeted for during this time in?luded ?ontra?ts for military airplanes of all sorts, su?h as the B-1B and B-2 bombers, the stealth fighter, the stealth bomber, and signifi?ant ?ontra?ts asso?iated with the B-52 bomber and the K?-135 tanker. They also ?ompeted for ?ontra?ts for heli?opters, pilot-less drones, and the planned spa?e station, and they won an intense ?ompetition to build the new presidential airplane- Air For?e One. A ?ompetitive environment existed in these two markets that in?reasingly demanded high te?hnology ?omputing solutions in areas su?h as ?omputer-aided design and manufa?turing. Company’s Background and Operations’ Analysis ?ivil aviation is the largest export industry in the United States, and the Boeing ?orporation, whi?h ?ontrols nearly one hundred per?ent of the U.S. ?ivil aviation manufa?turing industry, is the largest exporting manufa?turer in the United States and the world. Boeing’s impa?t on “the U.S. e?onomy, while possibly limited in purely ma?roe?onomi? terms by its status as one large multinational ?orporation among many, is immense” (Boeder 18). It is also disproportionate when ?onsidered in industrial, strategi?, and geopoliti?al terms. In a time of in?
reasing globalization, and the ?on?omitant dilution and diminution of national symbols, Boeing is one of the world’s most re?ognizable and valuable brands. In a time of in?reasing e?onomi? fragmentation, Boeing’s presen?e as a dominant for?e in the U.S. industrial market enables various other a?tors in the U.S. e?onomy. In a time of ?onsolidation of military ?ontra?tors, Boeing has emerged as one of perhaps three or four military-industrial market parti?ipants ?apable of meeting the needs of the United States military a?ross a variety of produ?t lines. Whether looked at through the lens of hard power, soft power, or e?onomi? power, the su??ess and maintenan?e of Boeing’s manufa?turing ?apabilities and market su??ess is of vital interest to U.S. national se?urity, just as Europe has re?ognized the importan?e of Airbus in prote?ting the se?urity of Europe. The ?orollary is also true: those outside for?es that threaten Boeing, espe?ially by utilizing extra-market methods of prote?tion with whi?h Boeing ?annot legally or pra?ti?ally ?ompete, pose a danger to U.S. national se?urity. Ea?h day, more than “three million passengers board 42,300 flights on Boeing jetliners, more than 345 satellites put into orbit by Boeing laun?h vehi?les pass overhead and 6,000 Boeing military air?raft stand guard with air for?es of 23 ?ountries and every bran?h of the U.S. armed for?es” (Boeing Annual Report, 2003). Boeing is the leading aerospa?e ?ompany in the world and a top U.S. exporter. Boeing has made a serious investment in its Safety System, whi?h ?ontains histori?al loss data for the entire organization, and enables them with the ability to analyze Boeing’s risk portfolio as a whole and model the impa?t of different insuran?e stru?tures on the ?ompany’s ?ost of risk. United Te?hnologies provides high te?hnology produ?ts to the aerospa?e and building systems industries. Boeing’s related litigation, ?hanges in federal, state and lo?al regulation with regard to employee health and safety and the environment; a signifi?ant portion of Boeing’s ?ustomers, are in the ?ommer?ial air transport industry. Stock Prices Analysis for Boeing Over the course of its storied history, Boeing Co. has built a can-do reputation that borders on cockiness. While rival plane makers have come and gone, Boeing has emerged as the nation’s 11th-largest company, its largest exporter and a driving force in the Northwest economy with 115,000 workers in Washington state.
But these days the company, renowned for its self-confidence, instead is grappling with self-doubt and recrimination, its commercial airplane division plagued by chronic parts shortages and an outdated production process. There are even widespread rumors that a feud has broken out among company executives. Despite near-record sales of airplanes, Boeing’s shareholders have watched in dismay as the value of the company’s stock has languished, left behind by the stock market boom. In 1997, Boeing reported an annual loss for the first time in 50 years. Earlier this year, it announced it would “charge off another $350 million for the first quarter of 1998” (Annual Report 1997). Wall Street rating agency Standard & Poor’s has responded by putting the company’s A-plus long-term debt on credit watch. Exactly what went wrong with Boeing’s commercial airplane division since year 1997 is something that even company officials can’t quite agree on. One thing seems clear. Boeing’s problems were triggered by a flood of orders from airlines around the world. U.S. carriers especially were eager to expand their fleets after two years of fat profits. Boeing encouraged them by pricing its planes aggressively. Its sales force was well-armed, having just introduced the company’s first two computer-designed airplanes, the wide-body 777 and a next-generation version of the smaller 737 model - the world’s most popular jetliner. The sales push succeeded. Boeing reeled in enough orders to keep its factories humming through the end of the century. The company had a backlog of 1,751 airplane orders totaling more than $90 billion. To keep all those commitments, Boeing executives figured on ramping up production from “18 airplanes a month to 43. In 1998, the company has built and deliver 550 planes, up from 271 two years earlier” (Boeder 23). Speeding up production isn’t easy when one’s building something as complicated as a commercial jet. The 747 model, assembled in the northern suburb of Everett, for example, contains as many as 6 million parts that flow into the factory from a vast network of suppliers around the world. The spike in demand strained Boeing’s suppliers. When the company asked them to crank up production, many were unprepared, having cut back their operations during the early 1990s slowdown.
The problem was aggravated by the company’s earlier decision to go to a system of just-in-time parts inventory. The system is a money-saving strategy introduced by Japanese manufacturers during the 1980s. It lets companies cut operating costs by keeping a minimum number of parts on hand and ordering them as needed. For Boeing, however, the system meant few parts were in storage when the airplane boom hit in 1996. By last fall Boeing officials counted 2,600 parts shortages, all the way down to the metal supplied by Alcoa Aluminum Company. Since airplane mechanics must have exactly the right parts in the right sequence to keep the jets moving down its quarter-mile-long production line, the shortages meant workers had to travel up and down the line, doing work out of sequence to keep up. Boeing’s commercial-plane business has been hammered by competition from European rival Airbus SAS, and its defense-industry unit has come under federal scrutiny from Congress and the Defense Department over its handling of contracts for new business. Boeing has been plagued by problems including a drop-off in business travel that slowed orders for new planes. Perhaps the most serious issue it faces surrounds a tanker jet it produces for the Air Force. Airbus, based in France, delivered about 300 commercial planes in 2002. Boeing delivered about 280. Airbus has a backlog of 1,020 for its A320 series of aircraft, compared with Boeing’s backlog of 808 orders for its 737 jets. Boeing must makes changes and become more competitive. The company fell behind on two of its bread-and-butter models, the double-aisle 747 and the smaller, twin-engine 737, and the cost of building the planes mushroomed. Since then, the situation has improved, but production is still behind schedule at Boeing’s 737 factory in the southern suburb of Renton. DDM Analysis It is now relatively common to see Wall Street strategists adjust the measured dividend yield by adding the value of share repurchases to that of dividends. Some companies are uncomfortable with this practice because they would rather that the issue of repurchases be handled within the DDM by leaving the measure of dividends unchanged, but allowing repurchase activity to influence share prices through their effect on the dividend per share assumption.
Of course, the implicit assumption that share repurchases are a one-for-one substitute for dividends almost certainly overstates the case. Dividends are rarely cut, but share repurchases can be terminated without the stigma of a dividend cut. Indeed, firms regularly repurchase rather less than they actually announce, but are not punished for this in the way that a cut in dividends would be. Capital Asset Pricing Model relates the required rate of return for any security with the risk for that security as measured by beta. In formula terms, r = rf + beta (rm – rf), where r is the return of the risky asset, rf is the return of the risk free asset, beta is a measure of risk of the asset relatively to the whole market, and rm is the return of the market portfolio. The spirit of CAPM is beta. If there is no beta, then CAPM doesn’t exist. The price of a dividend can be established using the Dividend Growth Model represented by a formula: P = Div1 / (r – g), where r is a required rate of return and g is the estimated growth rate. According to CAPM, r = 5% + beta * 7% and g = retention ratio * ROE. The Boeing Company As of: 4:04 PM EST on Dec 08 Last Prev. Close Day Range EPS Div Shares Outstanding 52.80 53.75 52.42 - 53.98 3.16 $.80 839,434,000 Change % Change 52 Week Range Volume P/E Yield Market Cap - 0.95 1.77 38.04 - 55.48 4,251,600 15.72 1.61 41,703,088,000 DJIA 10,494.23, +53.65 S&P 1,182.81, +5.74 NASDAQ 2,126.11, +11.45 Source: http://ir.shareholder.com/ba/stock.cfm The dividends that were declared for Boeing Corporation as of the 8-th of December 2004 were 80 cents. Since we have to use future dividends but not past, we have to solve for Div1, which is Div1 = P * (r – g). Also, 60 month Beta is 0.842, thus r = 5% + 0.842 * 7%, r = 10.894% One can conclude that Div1 = 0.8 * (r – g), since g is the growth rate and we require future dividends, but not past. g = 0.35 (which is a retention ratio) * 29.3% (which is ROE) = 10.44% . Hence, Div1 = 0.3632. P = 0.3632 / (10.894% – 10.44%), P = 0.1649