Boeing shares soared 5.6 percent Wednesday after the company released fourth-quarter earnings that beat Wall Street expectations and showed a surge in cash flow.
Boeing shares soared 5.4 percent Wednesday after the company released fourth-quarter earnings that beat Wall Street expectations and showed a surge in cash flow.
After a year of record jet orders and deliveries, Chief Executive Jim McNerney declared Boeing “stronger, healthier and better positioned in its markets than any time in recent memory.”
On a teleconference call Wednesday morning, McNerney spoke of Boeing dominating Airbus with its big widebody jets, especially the 787 Dreamliner and the forthcoming 777X.
“We have built a substantial technological lead in commercial aviation, particularly in the high value twin-aisle market,” said McNerney, adding that “you hate to say it this way, but there is not much competition” for the 777.
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That plane’s direct competitor, the Airbus A350-1000, has sold poorly, and many analysts believe it needs to be revamped to counter the 777.
McNerney also underscored Boeing’s emphasis on modernizing its assembly plants, speeding the automation of its production lines for the forthcoming 737 MAX and 777X jets.
He said Boeing is “committed to breaking the cost curve on our new development programs and delivering them on time, with performance as advertised.”
Cash finally flowing
What impressed the stock market Wednesday was the cash generation evident in the quarterly results.
“Cash has been the mantra from Boeing over the last couple of years, and investors have finally seen the 2014 cash flow show up,” wrote RBC Capital Markets analyst Rob Stallard in a note to clients.
Operating cash flow, the net cash a business generates, can provide a more accurate picture of how a company is currently performing than does net profit, because it sets aside longer-term noncash items, such as depreciation of equipment, that would lower profits.
The jet-maker raked in $5 billion in operating cash flow in the fourth quarter, up from $1.4 billion the previous year. That helped allay concerns evident after the previous quarter’s earnings data were released, when Boeing stock sank after cash flow disappointed.
Boeing had then projected total 2014 operating cash flow at $6.25 billion.
Just three months later, after a year-end rush of 787 deliveries and some payments expected in 2015 that instead came in before year-end, the year’s cash flow closed instead at $8.9 billion.
And management projected Wednesday that cash flow for 2015 will be more than $9 billion.
Chief Financial Officer Greg Smith also held to the previous forecast that deferred production costs on the 787 Dreamliner — the accumulated manufacturing costs that Boeing has pushed into the future by spreading them over a total of 1,100 planes — will peak and begin to come down shortly after the program increases the rate to 12 jets per month in 2016.
Once that happens, cash generation will accelerate and that prospect is what has investors buying the stock.
Shares closed up $7.16 Wednesday at $139.64.
Deferred costs mount
Analysts on the conference call seemed wary of Smith’s projection that 787 deferred costs will peak next year, since in the fourth quarter they had climbed by $1 billion, more than expected, to reach $26.1 billion.
(Without spreading those costs over more than 1,000 future airplanes, Wednesday’s data show, the $6.4 billion pretax profit from operations recorded for the commercial jet division last year would instead have been a $122 million loss.)
Bernstein analyst Doug Harned in a note to clients said the increase in the deferred costs indicates 787s delivered in the final quarter of 2014 were costing Boeing on average about $32 million more than the sale price.
Barclays analyst Carter Copeland called that “the most negative element of the quarter.”
According to UBS analyst David Strauss, the still-swelling 787 deferred production cost total could reach as high as $29 billion before it comes down.
Yet Smith’s assertion that the peak is nevertheless coming in 2016, as previously forecast, means he expects 787 production costs to drop significantly by next year.
He said 787-8 production costs have fallen about 30 percent since deliveries resumed after the battery fires in early 2013.
And he said the cost of making the larger 787-9, which was first delivered at the end of June last year, has already declined 20 percent.
“We’re coming down at a lower rate than what we expected,” said Smith, only because Boeing is investing the money and labor to make the 787 assembly process more efficient and stable at the plants in both Everett and North Charleston, S.C.
He said he’s confident the 787 will turn “cash positive” this year, meaning that the money taken in for each jet will be more than the cost to build it.
That’s already a milestone. However, even as the unit costs drop, the deferred costs’ total will continue to climb for a while as Boeing spends extra money to increase the production rate to 12 per month and also to introduce the next model, the 787-10.
Assuming the deferred costs peak as Smith predicts, investors should then see a bump in cash flow that better matches Boeing’s increased stream of jet deliveries.
In a record 2014, Boeing earned a net profit of $5.4 billion, on revenue of $90.8 billion.
That’s up from $4.6 billion in net profit on revenue of $86.6 billion in 2013.
Earnings per share in 2014 was $7.38 versus $5.96 the previous year.
Excluding special items and pension expenses, Boeing pegged its so-called core earnings for the year at $8.9 billion, up from $7.8 billion the previous year.
At year end, the company had accumulated more than $13 billion in cash and liquid assets.
The final quarter of the year contributed more than its share of jet deliveries and cash and helped Boeing exceed analyst expectations.
Boeing earned $1.47 billion, or $2.02 per share, in the fourth quarter, compared with $1.23 billion, or $1.61 per share, a year ago.
The so-called core earnings rose to $2.31 per share. Analysts expected $2.11 per share, according to FactSet.
Revenue rose 3 percent in the fourth quarter to $24.5 billion, also beating FactSet’s Street forecast of $23.9 billion.
Boeing projects it will deliver 750 to 755 commercial jets this year, up from a record 723 jets in 2014.
Boeing to build next Air Force One
The Air Force will let Boeing build the replacement for Air Force One without competition but allow bidding on specialized equipment for the new presidential aircraft, the service informed Congress.
Air Force Secretary Deborah James on Wednesday signed a document that justifies keeping Boeing as the sole source contractor to provide three modified 747-8 passenger planes, according to an email notifying congressional committees.
The service determined that Boeing’s aircraft is the only one manufactured in the U.S. “that when fully missionized meets the necessary critically important capabilities” that the president needs, the email said. The competition would be for systems such as the plane’s advanced electronics and communications.
Boeing has been the sole provider of aircraft used by U.S. presidents since 1962, according to its website.
While Air Force One is the designation for any plane carrying the president, it usually refers to one of two current 747s outfitted with features that include a presidential suite and conference room and advanced security and communications, according to the White House website.
It can be refueled in midair and serve as a mobile command center if the U.S. comes under attack.
James determined a sole-source contract for the aircraft and spare parts “is in the public interest,” the congressional notification said. The decision doesn’t trigger an immediate contract award, as the Air Force continues to complete its acquisition strategy, according to the service.
Toulouse, France-based Airbus said in 2013 it didn’t intend to make a proposal based on its double-decker A380 jet. Still, the service “intends to incorporate competition” for the aircraft subsystems and “will participate substantially in any competition led” by Boeing, it said.
The Air Force has budgeted $1.6 billion for research through 2019 on the presidential aircraft-replacement program.
The Air Force is seeking to replace its aging Boeing 747-200 aircraft, which will reach their planned 30-year service life in 2017. The first new Air Force One isn’t expected to be delivered until 2018 and won’t enter service until 2023, after testing.
Boeing spokeswoman Caroline Hutcheson had no comment pending a formal Air Force announcement.