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Cash Is King as Boeing Investors Look Past Rare Earnings Miss

April 27, 2016
While Boeing reported an accounting loss on refueling tankers in the period--its third such charge --investors focused instead on cash and 787 Dreamliner gains. 

Boeing Co.’s siren call to investors has been its bountiful cash, and they responded again Wednesday even after the U.S. planemaker’s quarterly profit fell short of analysts’ estimates for the first time in five years.

While Boeing reported an accounting loss on refueling tankers in the period--its third such charge--investors focused instead on cash and 787 Dreamliner gains. The planemaker’s assurance that it would still meet annual financial targets also helped push shares to the biggest gain on the Dow Jones Industrial Average.

“On a day where you miss, that’s a pretty good outcome,” George Ferguson, senior air transport analyst with Bloomberg Intelligence, said of Boeing’s share performance.

The planemaker’s stock increased 3.3% to $137.66 at 3:25 p.m. in New York. The shares slipped 7.8% this year through Tuesday, the third-worst result among the 30 Dow’s 30 members.

Boeing’s gains were tempered by skepticism that the company can make good on Chief Executive Officer Dennis Muilenburg’s promise of mid-double-digit profit margins for its commercial jetliner business by next year, Ferguson said by phone. The measure fell to 7.2% from 10.5% the prior year as the company absorbed higher costs to build tankers for the U.S. Air Force and contended with lower 747 jumbo sale proceeds.

Tanker Charge

The accounting loss reduced first-quarter profit to $1.74 a share, Boeing said in a statement Wednesday. That missed analysts’ estimates by 10 cents a share. Excluding the one-time loss and some pension expenses, earnings were $1.98 a share.

Boeing’s struggle to develop the first new U.S. tanker since the 1980s has added to skittishness among investors. They’ve also been concerned about a glut of planes in the global market and a federal probe of company accounting, which was reported by Bloomberg News. However, the manufacturer exceeded forecasts in another key measure: Its free cash flow of $483 million was better than the $357.6 million outflow anticipated by analysts.

“It’s the gift that keeps on giving as Boeing absorbed another charge on tanker, but the cash flow story is intact,” Jason Gursky, an analyst at Citigroup Inc., said in a report to investors Wednesday. Boeing’s strong cash flow in a traditionally weak quarter points to its potential to generate amounts that would support a $200 stock price over time, he said.

Marquee Jet

To get there, Chicago-based Boeing needs to lower costs on the 787 Dreamliner, its marquee jet. Deferred production costs for the 787 rose $141 million to $28.7 billion from the end of 2015. 

Boeing has said the figure, which measures funds already poured into inventory and labor against increases in production efficiency, will plateau this year as it speeds output. Output should rise to 12 aircraft a month by mid-year and reach a monthly rate of 14 later this decade, both records for long-range aircraft.

Higher deliveries of military aircraft and Boeing’s lower 787 production costs helped boost operating cash flow to $1.23 billion from $88 million a year earlier. The company expects an operating cash flow of $10 billion this year as it tightens spending and speeds the production tempo of best-sellers such as the 787 to take advantage of a near-record backlog. It’s been returning money to shareholders, spending $3.5 billion on its own stock during the quarter.

“The first quarter is typically one of the weakest for cash,” Ken Herbert, an analyst at Canaccord Genuity, said by phone. Free cash flow in the reporting period represented a “$900 million swing from a year ago.”

Per-share profit results were for a measure that the planemaker dubs core earnings, which it says gives a better picture of its results by adjusting for market fluctuations in pension cost. Net income slid 9% to $1.21 billion, or $1.83 a share, from a year earlier. Total sales advanced to $22.6 billion, exceeding the $21.5 billion projected by analysts.

Commercial Airplanes

Profit at Boeing’s commercial airplanes division tumbled 36 percent to $1.03 billion from a year earlier as the company delivered fewer jetliners and absorbed costs for the tanker development and slowing 747 jumbo jet output. Defense division profit grew 11% to $822 million, reflecting strong performance on military aircraft such as the F-15 fighter program.

The tanker-related charge is the latest reported by Boeing, which had already absorbed $1.26 billion in pretax accounting losses converting its commercial 767 jetliners into aerial gas stations for the Pentagon. Wiring issues and damage to a test aircraft’s fueling system erased any profit for the first of potentially $80 billion in planes.

Pentagon Deadline

The first-quarter accounting loss, for $156 million on an after-tax basis, reflects added costs to retrofit the first seven production aircraft in its factory with technological improvements made as the tankers are flight-tested, Muilenburg said Wednesday.

Boeing’s chief executive said the company was committed to meeting a Pentagon deadline to deliver the first 18 of the aircraft by August 2017. And he described a company push to improve productivity and lower costs, from culling jobs to renegotiating supplier arrangements.

“That’s good business,” Muilenburg said. “It’s the right way to run the business, and we are committed to that path.”

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