Boeing Falls Most in Dow as Tanker Cost Stirs Concern

Boeing Co. (BA) fell the most among stocks on the Dow Jones Industrial Average as a cost for the KC-46A aerial tanker rekindled concern that the planemaker would struggle with another new aircraft program.

The $272 million after-tax expense for the military jet overshadowed Boeing’s increase in its full-year profit forecast. Second-quarter earnings also beat analysts’ estimates today, buoyed by faster production that is sending jetliner deliveries to record levels.

“The headline was good, but as people dug into the numbers, sentiment turned,” Ken Herbert, a San Francisco-based analyst with Canaccord Genuity Inc., said by e-mail. Investors didn’t like the tanker charge and a reliance on tax gains for much of the boost in the 2014 profit projection, he said.

The stock slid 2.3 percent to $126.71 at the close in New York, its biggest daily drop since April 10. The decline was the biggest among the 30 companies in the Dow, and the second-largest in the Standard & Poor’s 500 Industrials Index.

Boeing’s delays producing the composite 787 Dreamliner hang over the development of the tanker, which is modeled on the 767 wide-body passenger jet produced since the 1980s. Redesigned wiring harnesses, rather than new innovations, increased engineering and manufacturing costs for the aerial refueler, said Jim McNerney, chairman and chief executive officer of the Chicago-based company.

‘Franchise Player’

“The issues at hand are well-defined and understood” and the spending kept the tanker on track to begin flight testing next year, he told analysts today on a conference call. With a potential market of 400 airplanes valued at $80 billion, the tanker “remains a franchise program for Boeing, and we expect to realize strong returns over decades of production and in-service support,” McNerney said.

Boeing’s selloff also reflected investor concern that plane orders have peaked, and frustration that the planemaker didn’t raise cash-flow projections along with profit estimates, Yair Reiner, a New York-based analyst with Oppenheimer & Co. Inc., said in a note to clients. He rates Boeing the equivalent of a hold, while Canaccord’s Herbert recommends the stock as buy.

Earnings for 2014 excluding some pension expenses will be in a range of $7.90 to $8.10 a share, Boeing said, compared with a previous projection for $7.15 to $7.35. Second-quarter profit on that basis of $2.42 a share exceeded the $1.98 average of 20 analysts’ estimates compiled by Bloomberg, continuing Boeing’s streak of beating or matching estimates extending to 2009.

Delivery Record

The company handed over 181 commercial jets to customers last quarter, the most ever. Sales increased 1 percent to $22 billion, trailing the $23 billion projected by analysts. Revenue in the commercial business rose 5 percent to $14.3 billion and slid 5.4 percent to $7.75 billion in Boeing’s defense operations as the U.S. government pares military spending.

Boeing’s results were buoyed by two tax-related gains: $116 million that had been previously announced as well as a $408 million benefit disclosed today.

The net gain from the one-time tax boost amounted to 34 cents a share, while a lower share count after Boeing spent $1.5 billion on stock repurchases also bolstered earnings per share, according to Christian Mayes, an Edward Jones & Co. analyst in Des Peres, Missouri, who rates Boeing as hold.

“They did a little bit better than expectations,” Mayes said by phone. “But after you strip out the one-time items, it wasn’t that much better.”

Net Income

Since last year, Boeing has used a profit measure dubbed core earnings per share, a figure the company says gives a clearer picture by adjusting for market fluctuations in pension cost. Net income jumped 52 percent to $1.65 billion, or $2.24 a share, from $1.09 billion, or $1.41, a year earlier.

Boeing is benefiting as its factories churn out 737, 777 and 787 aircraft at the fastest pace ever amid an order backlog shared with Europe’s Airbus Group NV (AIR) that’s valued at about $1 trillion.

While Boeing still loses money on every Dreamliner it assembles, losses are shrinking as it smoothes out production kinks and takes advantage of supplier discounts that took effect earlier this year, Douglas Harned, a Sanford C. Bernstein & Co. analyst in New York, told clients yesterday in a note.

Investors are tracking how the supplier agreements affect the 787’s deferred production cost, an accounting measure that is supposed to drop as the assembly expense declines with a projected gain in efficiency. Boeing estimated a ceiling of $25 billion last year, up from a previous forecast of $20 billion.

The cost measure rose 4.8 percent to $24.24 billion from the previous quarter.

While Boeing’s policy is for executives to retire at age 65, McNerney said he will be staying on the job and “continuing to build a succession plan.”

McNerney responded with a quip when asked about his plans after turning 65 next month. “The heart will still be beating, the employees will still be cowering, I’ll be working hard,” he said. “There’s no end in sight.”

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 John Lear

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