July 2005 
Volume 04, Issue 3 
Focus on Finance

Grow me the money

Balanced revenues and earnings growth essential to success

In this, the second in a four-part series on Enterprise Financial Targets—the new, aggressive, company-level financial metrics introduced earlier this year—Boeing Frontiers looks at the importance of fundamentals such as revenue and earnings growth in driving sustained value creation.

As Boeing stock nears its four-year high—at press time the stock price had risen about 25 percent for the year to date—many employees are asking what's driving Boeing stock price and how the company can maintain this momentum.

Great product innovation, inspired leadership, advantageous market position and brand recognition all clearly are important. But the basic "blocking and tackling" of running a healthy core business is what gets noticed and, more important, rewarded on Wall Street.

The more successful Boeing is at achieving top financial performance and appropriate stock valuation, the more the company will grow—and the more opportunities will be created for employees.

Two fundamental measures of performance closely correlated to stock performance are steady, consistent and balanced revenue growth and earnings growth.

"Boeing's goal is to achieve sustained value creation for shareholders over the long term," said Boeing President, CEO and CFO James Bell. "And that means consistently delivering balanced growth in revenues and earnings, using assets efficiently as indicated by cash flow and return on net assets, and generally providing stable, predictable results."

That last part is especially important, as Heidi Wood, aerospace analyst at Morgan Stanley, recently told a gathering of Boeing Finance leaders in Southern California. While Wood admitted the hunt for the best stocks is part art and part science, she's adamant the science side—the elements measured by Boeing's Enterprise Financial Targets—is critical.

With 5,600 publicly listed stocks for investors to choose from, "the most valued qualities on Wall Street are a company's visibility, predictability and profitability," Wood said. When business performance is consistent, visible and measurable, investors "trust it more" because it reduces risk. Wood cited Boeing's Enterprise Financial Targets as the kind of disciplined approach to measuring and communicating performance the financial community likes to see.

Balanced, consistent revenue and earnings growth also plays an important role in a company's valuation. Data from Boeing's Financial Planning and Analysis group, which tracks and analyzes top-quartile performers from the Standard & Poor's list of premier U.S. companies, suggests it is very important.

For example, consider Johnson Controls, an automotive systems and controls company based in Milwaukee: 2004 was its 58th consecutive year of sales increases and the 14th consecutive year of earnings increases. The company's ability to consistently meet expectations and steadily deliver revenue growth of 10.5 percent compounded annually since 1999, and 14.3 percent earnings growth compounded over the same period, has made its stock, as of Dec. 31, 2004, a top-quartile performer for the previous three-, five- and 10-year periods.

Paccar Inc., a Bellevue, Wash.-based commercial truck company, shows companies in cyclical industries such as Boeing's can achieve consistency in revenue and earnings growth over time. Paccar's 10-year revenue growth averaged 9.7 percent and earnings growth over the period averaged 13.6 percent, again both compounded annually.

As of Dec. 31, Boeing was not a top performer in any of the past one-, three-, five- or 10-year periods.

Unlike top-quartile performers' near-double-digit revenue and earnings growth, Boeing's 10-year revenue compound annual growth rate is 4.1 percent (see chart). Revenue rose from $35.0 billion in 1994, peaking in 1999 and 2001 at $58.0 billion, before declining to $52.5 billion in 2004. Average annual earnings growth over the period was only 2.4 percent.

So what can Boeing and its people do to drive consistent revenue and earnings growth and achieve its financial targets? A lot. The company can continue to introduce new products like the 787 Dreamliner. It can improve existing products like it's done with 777 and 737 variants. It can enter new markets such as the Multi-mission Maritime Aircraft or increase its share in existing markets with more aggressive sales. And it can focus on higher-margin products and services while finding new ways to reduce existing costs through Lean initiatives. Boeing employees at all levels and in all functions have a role to play, Bell said.

Another way companies achieve consistent revenue growth is through acquisitions. In fact, recent research suggests a correlation between frequency of acquisitions and above-average stock returns.

Provided Boeing executes well, its current market position and backlog are expected to ensure sufficient organic, or internally generated, near-term growth. Over the longer term, the company will continue to pursue value-creating acquisitions—where appropriate—that fit with its strategy and align with core competencies.

"Balanced revenue and earnings growth over the long term is clearly a key to creating shareholder value," Bell said. "We've got some momentum going, and it's up to Boeing employees to help us sustain it."

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