Boeing Sees ‘Healthy’ Jet Market as Deliveries Boost Cash Flow

  • 2015 profit forecast raised; quarterly earnings beat estimates
  • Closely watched 787 production cost grew less than projected

Boeing Co. reassured investors that the aerospace market remains robust after raising its full-year profit forecast amid rising jetliner deliveries and a slowdown in 787 Dreamliner costs.

The results on Wednesday showed Boeing’s factories are operating in high gear, and the shares rose. Investors have been seeking evidence that there isn’t glut of new planes and that expenses for the 787, the world’s first jet built chiefly of composite materials, are finally under control four years after its tardy commercial debut.

Industrywide sales remain “healthy, driven by improving airline profitability, solid traffic and meaningful replacement demand,” Chief Executive Officer Dennis Muilenburg said. “Airplane order activity and customer discussions are continuing at a moderating but historically healthy pace.”

Muilenburg played down speculation that a “bubble” is weighing on wide-body sales, and disputed an assertion by Delta Air Lines Inc. CEO Richard Anderson that used 777 jets -- which list for as much as $339.6 million when new -- now fetch as little as $10 million. Anderson’s remark last week reinforced some shareholders’ concern that slowing global growth, especially in emerging markets, will choke off jetliner sales.

“That number is in the wrong order of magnitude,” Muilenburg said on a conference call. “And frankly, the value of the 777 is holding up very well in the marketplace.”

The CEO’s comments helped soothe Wall Street on a rollercoaster day when Boeing’s stock was at times the best and, briefly, the worst performer on the Dow Jones Industrial Average.

Boeing climbed 1.7 percent to $141.19 at the close in New York. The stock’s 8.6 percent advance this year has outpaced the Standard & Poor’s 500 Index, which fell 1.9 percent.

Earnings for 2015 excluding some pension expenses will range from $7.95 to $8.15 a share, Boeing said, topping a previous projection of $7.70 to $7.90. Third-quarter profit of $2.52 a share exceeded the $2.20 average of 18 analysts’ estimates compiled by Bloomberg.

Free cash flow of $2.3 billion surpassed analysts’ $1.8 billion estimate. Aircraft deliveries rose 7 percent to 199, including a record 37 Dreamliners. Manufacturers typically receive the bulk of payments when they hand over planes to buyers.

Stock Buybacks

Boeing spent $1.5 billion to buy back 11 million shares during the quarter, leaving $6 billion remaining under its current authorization. This year’s repurchase spending totals $6 billion so far, for 41 million shares.

While Boeing still loses money on each Dreamliner it builds four years after the carbon-fiber jet’s tardy debut, the losses are shrinking. Investors focused on the company’s cash-generation potential have been charting the 787’s deferred production cost, an accounting measure that is supposed to drop as a projected gain in efficiency drives down the assembly expense.

Dreamliner costs rose $577 million to $28.3 billion, according to Boeing’s website. That “was slightly better than expected,” Carter Copeland, a Barclays Plc analyst, said in a note to clients. He said his estimate for the increase was about $700 million.

Boeing expects deferred production costs to approach their peak in the fourth quarter, flatten next year and then tumble once output accelerates 20 percent to a 12-jets-a-month pace.

“They’re starting to figure out how to build the airplane in a really nifty way,” Howard Rubel, a managing director with Jefferies LLC, said in an interview.

R&D Projection

Boeing also lowered its projected spending on research and development for the year by $100 million to $3.4 billion. The reduction signals “that the programs they have in development appear to be on schedule,” Rubel said. He rates Boeing as buy, the equivalent of the recommendation from Copeland.

The per-share results were for a measure that Boeing dubs core earnings, a figure the company says gives a clearer picture of its results by adjusting for market fluctuations in pension cost. Net income rose 25 percent to $1.7 billion, or $2.47 a share.

While commercial-aircraft revenue rose 10 percent to $17.7 billion, earnings from operations dropped 2 percent to $1.77 billion. The unit’s operating margin fell to 10 percent from 11.2 percent a year earlier as Boeing delivered more of the unprofitable 787s.

Revenue for Boeing’s defense, space and security unit rose 6 percent to $8.35 billion. Profit increased 19 percent and margins improved to 12.2 percent from 10.8 percent a year earlier.

The good performance is a positive development for Boeing, Robert Stallard, an analyst with RBC Capital, said in a note to clients. “However, the debate on whether Boeing will ever make back the $28 billion of 787 costs that it has incurred in excess of booked profits is ongoing,” he said. “All this assumes that the aerospace up-cycle serenely carries on to 2020 and beyond, which would make for the longest up-cycle since the Wright brothers first took to the air.”

Before it's here, it's on the Bloomberg Terminal.