Boeing Co. will remain a cash-generating juggernaut even if weak demand forces deeper production cuts to the 777 jetliner, a crucial source of profit, Chief Executive Officer Dennis Muilenburg said.
Cash flow will increase next year and in 2018 as the Chicago-based planemaker fills a record backlog of orders and reaps its first profits from the 787 Dreamliner, Muilenburg said on a conference call with investors and analysts. The company’s coming cash bounty has been a selling point with investors, potentially bolstering shares in a tough market for jet orders.
Investors’ uncertainty over Boeing’s business case sent shares on a wild ride Wednesday. The stock fell after the market opened and then reversed course to become the biggest gainer on the Dow Jones Industrial Average after Muilenburg said cash generation would grow under every scenario contemplated for the 777, the company’s second-largest profit driver.
“The fact that stock has been basically flat for almost three years tells you it is absolutely a ‘show-me’ story,” Charlie Smith, chief investment officer with Fort Pitt Capital Group, said in an interview Wednesday. There’s upside for investors if Boeing can run its factories efficiently enough to “reach the cash flows that allow this stock to break from trading with orders.”
The shares climbed 5% to $145.97 at 3:31 p.m. in New York, the biggest intraday gain since January 2015.
Cooling Market
Investors have been nervous that the global aerospace market is cooling and wary of Boeing after recent earnings disappointments. The manufacturer in July reported its first quarterly loss in seven years and its first-quarter results missed analysts’ estimates for the first time in five years. Also of concern are Boeing’s ability to reap profit from its 787 Dreamliner after a decade of losses, while it transitions to new versions of its cash-cows, the 737 narrow-body jet and the 777 wide-body.
Several sales campaigns now underway will determine the near-term course for its largest twin-engine aircraft, the 777. Lagging orders already prompted Boeing to slow its assembly line to a monthly pace of seven jets starting early next year. The manufacturer had planned to deliver just 5.5 of the planes a month in 2018 as it builds the first flight-test planes for the upgraded 777X family of aircraft, which are slated to enter the market at decade’s end.
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In the worst case, output could slip to 3.5 planes a month before speeding up as production shifts to the 777X, Muilenburg said Wednesday.
“Across all of those scenarios that I just described, all of them, we see cash growing year-over-year in 2017 and then again in 2018,” he told investors. “And I think that’s an important thing to remember. This is a very robust cash growth business across all of those scenarios.”
Earnings Rise
Third-quarter earnings rose to $3.51 a share after adjusting for some pension expenses, Chicago-based Boeing said in a statement Wednesday. That topped the $2.67 average of analysts’ estimates compiled by Bloomberg. Free cash flow of $2.61 billion exceeded the $2.02 billion expected.
The results were boosted by 98 cents a share in tax-related gains. The planemaker signaled in July that it would receive a tax benefit of 28 cents a share stemming from an audit of its federal income taxes for 2011 and 2012. Earnings were bolstered by another 70 cents a share in tax-related gains that analysts hadn’t included in their forecasts.
Boeing also reported a $162 million accounting charge related to the the CST-100 Starliner spacecraft it is developing to ferry astronauts to the International Space Station. The company postponed its commercial crew test and development program for the National Aeronautics and Space Administration by six months because of supply-chain delays and a production flaw that forced the project to scrap the upper dome of the capsule to be used in the first manned flight test.
“The Boeing story continues to be all about execution and cash generation and this quarter didn’t disappoint despite a small hiccup in the company’s Space division,” Jason Gursky, an analyst at Citigroup Inc., wrote in a note to clients Wednesday.
Dreamliner Costs
Deferred production costs for the 787 Dreamliner fell by $150 million, or $4 million per plane, from the previous quarter to $27.5 billion as Boeing worked to reap cash from the marquee aircraft.
The first jetliner made from strands of spun carbon fiber is key to Muilenburg’s plan to achieve operating margins in the mid-teens and his vow to return 100 percent of free cash flow to shareholders despite the demands of developing new aircraft and the risk of political and economic turmoil.
The commercial airplane unit’s profit fell to 9.4 percent of sales from 10 percent. The defense business’s profit margin dropped to 10.4 percent from 12.2 percent. Muilenburg has stressed cost cutting and set a goal of double-digit profit margins for commercial jets next year.
Since 80 percent of its deliveries through 2020 are firm orders and already priced, “that means that any additional cost reduction will go straight to the bottom line, rather than be competed away,” Douglas Harned, an aerospace analyst with Sanford C. Bernstein & Co. Inc., said in an Oct. 17 report. “But, we would like to have more confidence that Boeing commercial airplanes truly can make progress on margin.”
