Boeing vs L.M. - Financial Statements Analysis

Topics: Balance sheet, Income statement, Financial statements Pages: 13 (4648 words) Published: June 1, 2014


Financial Statement Analysis

Western Michigan University
Department of Accountancy
Fall 2013

By: Adam A. Marshall

Introduction:

The following is a careful, financial statement analysis of two competing companies, Boeing Corporation (Boeing) and Lockheed Martin Corporation (Lockheed), in the aircraft, aerospace and defense industries. The format of the following paper coincides with the financial statement analysis process, as discussed in Financial Reporting, Financial Statement Analysis, and Valuation, A Strategic Perspective (the textbook) by Wahlen, Baginski and Bradshaw, which, involves a six-step interrelated sequential process. Those six steps, in sequential order, are as follows: identify economic characteristics and competitive dynamics in the industry, identify company strategies, assess the quality of the financial statements, analyze profitability and risk, project future financial statements, and value the firm. This process is applied to both Boeing and Lockheed, after which, based upon our analysis, we will decide how we would make an investment allocation between the two competing companies.

Step 1: Identify Economic Characteristics & Competitive Dynamics in the Industry

Boeing:

Boeing operates in five principal segments: commercial aircraft, military aircraft, network and space systems, global services and support, and capital services. All market segments experience significant competition and the overall industry could be described as an oligopoly, in which, a relatively small number of firms dominate the market while producing differentiated products, as extremely high barriers to entry exist, given the capital intensive nature of the industry.

Boeing describes the competitive nature of their operations in their annual 10-K report, as follows:

“The commercial jet aircraft market and the airline industry remain extremely competitive. We face aggressive international competitors who are intent on increasing their market share…we are focused on improving our processes and continuing cost reduction efforts. We intend to continue to compete with other airplane manufacturers by providing customers with greater value products, services, and support. We continue to leverage our extensive customer support services network...this enables us to provide a high level of customer satisfaction and productivity. BDS faces strong competition in all market segments, primarily from Lockheed Martin Corporation, Northrop Grumman Corporation, Raytheon Company and General Dynamics Corporation. Non-U.S. companies continue to build a strategic presence in the U.S. market by strengthening their North American operations and partnering with U.S. defense companies. In addition, certain of our competitors have occasionally formed teams with other competitors to address specific customer requirements. BDS expects the trend of strong competition to continue into 2013 with many international firms attempting to increase their U.S. presence.”

Additionally, Boeing operations face the economic characteristics of being heavily regulated, dependent upon the their ability to maintain their existing, and create new, patents, and the ability to source quality raw materials at effective prices. Lockheed:

Lockheed operates in five principal segments: aeronautics, information systems and global solutions, missiles and fire control, mission system and training, and space systems. Similar to Boeing, Lockheed faces intense competition in all business segments, with a growing concern regarding international firms and their penetration of the U.S. market.

Lockheed describes the competitive nature of their operations in their annual 10-K report, as follows:

“Our broad portfolio of products and services competes against the products and services of other large aerospace, defense, and information technology companies, as well as numerous smaller competitors, particularly in...
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