Boeing Profit Beats Estimates With Jet-Delivery Boost

Boeing Co. (BA) posted the biggest gain in the Dow Jones Industrial Average after easing investors’ concern that the 787 Dreamliner would be a cash drain.

The world’s biggest planemaker beat estimates today with a first-quarter profit, raised its 2014 forecast and showed $615 million in free cash flow. The “sigh-of-relief” results buoyed the stock, said Jeff Morris, who heads U.S. equities at Standard Life Investments, with more than $305 billion under management.

“There was a fair amount of anxiety going into the earnings release,” Morris said by phone from New York. “The thing the market was really focused on was the free cash flow, with some expectations it might be negative in the quarter” because of production issues that damped 787 deliveries.

Today’s earnings report extended a three-year run of topping estimates and showed the strength of Boeing’s civilian business, which posted an 18 percent gain in jet deliveries. Chicago-based Boeing climbed 2.4 percent to $130.63 in New York while the 30-company Dow average slid 0.1 percent.

Earnings excluding some pension expenses of $1.76 a share exceeded the $1.54 average of 19 analysts surveyed by Bloomberg. Citing a tax settlement, Boeing increased its 2014 forecast today for so-called core earnings to a range of $7.15 to $7.35, a 15-cent boost on both ends.

Photographer: Mike Kane/Bloomberg

Workers assemble a Boeing Co. 737 airplane at the company's factory in Renton, Washington. Close

Workers assemble a Boeing Co. 737 airplane at the company's factory in Renton, Washington.

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Photographer: Mike Kane/Bloomberg

Workers assemble a Boeing Co. 737 airplane at the company's factory in Renton, Washington.

‘Pretty Decent’

“They typically set a pretty low bar before they start the year,” Christian Mayes, an Edward Jones & Co. analyst in Des Peres, Missouri, said in an interview. “The quarter overall was pretty decent on both the commercial plane and defense side.”

Sales increased 8.3 percent to $20.5 billion, topping the $20.2 billion average estimate. Boeing Commercial Airplanes drove that gain, with revenue rising 19 percent to $12.7 billion while the defense, space and security unit declined 5.9 percent to $7.63 billion amid a U.S. military budget squeeze.

While free cash flow jumped from $3 million a year earlier, the comparison was skewed by a cutoff in Dreamliner deliveries a year earlier, when the global 787 fleet was grounded for three months after lithium-ion battery meltdowns on two of the composite-plastic planes.

New orders totaling $19 billion helped boost Boeing’s cash flow, which exceeded “expectations for a negative position,” Peter Arment, a New York-based analyst with Sterne, Agee & Leach Inc., said in a note to clients. He recommends the stock as a buy while Mayes has a hold rating on the shares.

Dreamliner Tempo

Dreamliners left Boeing’s factories at a rate of 10 a month, the company’s highest-ever tempo for a wide-body jet, while the assembly line for the narrow-body 737 achieved a 42-plane monthly rate in April, the planemaker said. Deliveries of the 787 didn’t keep pace with first-quarter output.

Analysts are watching the 787’s deferred production cost, an accounting measure that is supposed to drop as the expense of building the plane declines with a projected improvement in efficiency. Boeing said last year that it estimated a ceiling of $25 billion, up from a previous forecast of $20 billion.

Those expenses crept closer last quarter to Boeing’s new projection, rising by $1.5 billion to $23.1 billion, according to data posted on the company’s website.

Boeing sees deferred costs for the Dreamliner reaching the $25 billion peak late this year and remaining at that level until 787 production rises again, to 12 jets a month, in 2016, Chief Financial Officer Greg Smith told analysts during a conference call today.

Seeking Confidence

While deferred production costs will take longer to drop than Boeing had previously indicated, investors aren’t likely to care -- provided costs don’t creep higher, Standard Life’s Morris said.

“The plateau in deferred production cost into 2016 is fine as long as the market gains confidence that the peak has been achieved,” he said in an e-mail.

Carter Copeland, a Barclays Plc analyst, predicted earlier this month that Boeing would have negative free cash flow of $1.54 billion as the company struggles with production of a new Dreamliner, the 787-9, and tries to match deliveries to the higher output rate.

Boeing’s cash flow was “much better than many had feared,” Robert Stallard, an RBC Capital Markets analyst in New York, said in a note today. In March, he cut his cash-flow forecast to $545 million from $913 million, citing the Dreamliner.

Stallard rates the stock as outperform, the equivalent of Copeland’s overweight recommendation.

Hairline Cracks

Dreamliner deliveries fell to four a month during January and February as workers in Boeing’s Everett, Washington, plant handled work done out of sequence and inspected carbon-fiber wings on 43 in-production jets for hairline cracks flagged by a Japanese supplier.

Manufacturing missteps have plagued the Dreamliner since development began last decade, leaving the 2011 debut for the initial model, the 787-8, more than three years late. The 787 is the first jetliner built chiefly of composite materials rather than the traditional aluminum.

Boeing handed over 161 commercial jets in the period, including 18 Dreamliners. Last year’s tally was 137, with only one 787 in that total.

Boeing introduced its core earnings measure in 2013, saying that figure gives a clearer picture of profit by adjusting for market fluctuation in pension expenses. Without the adjustment, net income fell 13 percent to $965 million, or $1.28 a share, from $1.11 billion, or $1.44, a year earlier.

The company repurchased 19.4 million shares for $2.5 billion during the period after authorizing a $10 billion buyback plan, the largest in its history, in December.

To contact the reporter on this story: Julie Johnsson in Chicago at jjohnsson@bloomberg.net

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net Molly Schuetz, John Lear

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