Aerospace analysts split in their reaction to Boeing’s second quarter earnings. Many were upbeat on the commercial aircraft results, while others didn’t like the higher-than-expected, continued deferred expenses for the 787 program and a big charge on the KC-46A program.
Bloomberg News was quick to point to the KC-46A program charge and the implications that this is yet another costly new airplane program for Boeing.
Traders didn’t like the news, either, with stock falling more than $3 despite higher profits for the period and higher profit guidance going forward.
The Bloomberg article cites several analysts who didn’t like elements of the earnings report.
Here are initial notes, pre-earnings call, based on the press release:
Bernstein (Outperform [Buy])
Adjusting for the new one-time items, the result is still very strong. Core EPS would have been $2.23, and fully-reported EPS would have been $2.05, both well above consensus and our estimates.
The company raised 2014 guidance for core EPS to $7.90-$8.10 from $7.15-$7.35, i.e., by $0.75/share, and reiterated revenue guidance of $87.5-90.5 bn. Guidance for operating cash flow remains at $6.25 bn. The EPS guidance increase includes, but is substantially larger than the increment provided by the one-time items, and reflects improved operating performance. Margin guidance at BCA is raised to “more than 10%” from “~10.0%”, while BDS margin guidance remains steady at ~9.5%.
787 production costs continue to decline rapidly, in pursuit of Boeing’s target of limiting peak deferred production on the program to “approximately $25 bn”. Deferred production costs for the 787 increased by $1.1 bn in the quarter, compared to $1.5 bn in Q1. Total (cumulative) deferred production for the program is now approximately $24.2 bn. The learning rate remains very high, approximately a 70% “learning rate”. We estimate that continued progress at this rate should lead to deferred production peaking at $25.0-25.5 billion, which we view positively.
Buckingham Research (Neutral)
BCA sales of $14.3B slightly outperformed our $14.1B expectation but came in below consensus $14.8B. Segment operating income of $1.6B (10.8% margin) came in-line with our $1.5B estimate and 10.8% expectation. Since BA has already reported
deliveries for the quarter, we think the lower than expected sales difference implies lower pricing on widebodies that consensus was previously not factoring in.
BDS sales of $7.6B matched our $7.7B expectation but came in below consensus $8.2B. Ex the KC-46 charge of $272M (After tax), BDS margins of 9.9% exceeded our 9.4% expectation. We attribute the difference to higher volume in Boeing Military Aircraft and
higher than expected Global Services and Support sales.
787 Deferred Costs increased by $1.1B to $24.2B. We estimated a ~$1.0B increase to $24.1B, which implies higher than expected 787-8 and 787-9 costs. The higher implied 787 costs could weigh on the stock this morning. As our run rate for deferred production
is $26-$27B, the $100M higher than our expected deferred costs for the quarter increase our conviction that the $25B deferred production target will be exceeded, most likely before the end of the year.
We expect management to comment on the 787 cost reductions (and whether the $25B deferred production cost ceiling will be exceeded or not) and lower than expected legacy 777 orders YTD – two key pieces of our BA thesis.
BA reported Q2 core EPS at $2.42 above $2.02 UBS. Ex one time and unexpected items, we estimate core EPS at $2.24 as results included $0.37 charge on KC-46A Tanker offset by $0.55 tax benefit not previously included in our model. Beat driven by margin upside at BCA (Commercial Airplanes) at 12.5% ex KC-46A charge impact (140bps above our model). OCF at $1.8B below our $2.0B forecast on $1.3B inventory drag (in line with our forecast) while advances were only $100M benefit. BA repurchased $1.5B in shares in Q2, double our forecast.
787 deferred production grew by $1.1B, compared to our $1.0-1.3B forecast, with balance now at $24.2B as compared to BA’s ~$25B target. We estimate deferred production per unit at ~$35M, lower from ~$50-55M on supplier step down pricing and low production mix of 787-9s. We continue to believe that deferred production peaks well above BA’s $25B target.
Currently, 10 analysts rate Boeing a Strong Buy, nine rate it a Buy and seven have a Hold on the stock. None has an Underperform or Sell rating.
see “Unit-Cost Accounting” rows.
Boeing is booking future earnings as current and real.
It seems to me that they are burning cash. They are loosing money since 2012, although they paint it as “making profit”.
Or known as screw the USA and pay the Execs and shareholder accounting
Boeing isn’t screwing anybody, TransWorld.
The one time KC-46 charge will be spread over all 179 new tankers, about $1.5M per tanker. Boeing will soon be taking charge offs with the closure of the C-17 line and closing the Long Beach, CA plant altogether.
Boeing has only two programs not producing a profit, Ramiro, the B-787 and B-747-8. Both of which are expected to eventually break even and in the case of the B-787 make boat loads of money for Boeing. All other Boeing commercial lines are making money, the B-737, B-767, and B-777. Boeing Defense is making profits on the C-17, F-15, F/A-18, and missile programs.
No body talks about the Airbus losses on the A-380. Why? Because to many have been drinking the Airbus Kool-Aid. The A-350 program has yet to make a single penny. But, it will start making money. The B-747-8 program will eventually break even, or even make a small profit. I can’t say that for the A-380. Without EK there wouldn’t be an A-380 program today. What discount is EK getting? 50%? 60%? 70%?
The A-400M program will never see a profit unless it doubles the number of airplanes on order (to 340-350) over the current orders (174).
>>> No body talks about the Airbus losses on the A-380. Why? Because to many have been drinking the Airbus Kool-Aid. <<>>> The B-747-8 program will eventually break even, or even make a small profit. <<<>>> Without EK there wouldn’t be an A-380 program today. What discount is EK getting? 50%? 60%? 70%? <<<<>>> The A-400M program will never see a profit unless it doubles the number of airplanes on order (to 340-350) over the current orders (174). <<<<<
So what? As long as Airbus comes close to breaking even on this program then it's a win. The A400M Program helped Airbus learn how to build a Composite Aircraft and Industrialize it for Mass Production (Wings and all) on the Government's dime. Now…that's pretty darned smart of Airbus ain't it? And we'll see just how smart Airbus is when the A350 goes into a smooth Production Ramp that will show what a Train Wreck Boeing's 787 Ramp-up was.
Since Boeing only copied Airbus existing far flung manufacturing system but did it badly, not much chance of that.
I’m pretty sure that corporations aren’t in business to “coming close to breaking even”. If breaking even is starting back at zero, then “coming close to breaking even” would mean that you’re losing money and making no profit. I.E. spending $5 to make $3.
The 787 ramp up is going smoothly at the moment and having less traveled work out of the Charleston FAL. In comparison, Airbus would be going from producing 2 frames per month to “close to three”. http://www.flightglobal.com/news/articles/airbus-braced-for-a350-ramp-up-as-msn5-nears-flight-400364/ 10 vs 2 is hardly anything to get excited over.
When starting out from more than 3 times the expected assembly cost even a high learning rate doesn’t reduce production cost down into the originally planned bracket.
High learning rate does not mean that the 787 will not stay an expensive mess.
the basic planning assumptions were wrong and will stay wrong. No way past this.
Producing two to three directly deliverable frames per month ~1 year after roll out is quite remarkable if we stay with the 787 comparison.
When did boeing produce the first 787 frames that did not need to be significantly reworked? 2012/2013 ? ( 6..7 years after the 7.8.07 rollout 😉
They have only got about 18 planes contracted for. The pentagon is determined to not allow cost increases on any further production batches or may even buy the all ready flying KC330
Buy the KC330? Surely you jest.
“Ramiro, the B-787 and B-747-8”, that’s three. I take it Ramiro is a secret project, like Aurora.
kc135topboom…don’t even bother with the hypocrisy of this thread…:)
Compare “comparable” Airbus and Boeing financial numbers ( i.e B “Unit-Cost Accounting” )
With continuously negative UCA numbers Boeing is consistently sinking more money into 787 and 748 than they are making with their longstanding profitable products.
And it is really and mostly “burnt” money and not bound money via recoupable inventory value.
Boeing can appear profitable today due to a humongously large credit on the future.
It’s funny how you can’t ever discuss Boeing issues without deflecting to Airbus. I wonder why?
“The one time KC-46 charge will be spread over all 179 new tankers” – it’s not the first ‘one off’ charge, and it won’t be the last.
By Boeing’s own admission, the 748 will likely never make a profit, it’s still in a forward loss position.
The deferred costs on 787 are still rising.
Despite the profit increase, stock was down by over $3, Things that make you go “Hmmm.”
KC, you should know that the KC-X contract was a fixed price deal. So there is no room to spread some cost overruns over 179 new tankers offered for rock buttom prices of about $34 billion for 179 tankers.
The B767 line makes money? I would say this line makes revenue. The last aircraft were sold at a price to keep the line open for KC-46 to several air freight companies.
“No body talks about the Airbus losses on the A-380.”
The A380 without the dash was also about prestige to show the airlines Airbus can do it. That pays of now. Without the A380 Boeing would still make a huge profit on every 747-400 sold.
How many production lines for military transport aircraft will be open in 5 years from now? How many of these military transporters can move an armoured Stryker or Bradley?
@kc135topboom: “The B-747-8 program will eventually break even, or even make a small profit” – are you really sure… I know it’s a “cheap” derivative and all, but I don’t see Boeing being able to leverage good prices either. the only reason it exists is to prevent an airbus monopoly.
Oh, and to be fair – Airbus is not making money either, The whole aerospace industry is semi-gov’t anyway and both Boeing and Airbus (and to greater extends comac, sukhoi, bombardier and the other smaller players) survive only by the grace of gov’t support.
The only difference is that socialism isn’t a dirty word where airbus is headquartered.
With it’s pathetic orderbook, cost overruns and moribund prospects going forward it’s certain that 747 will never make a penny for Boeing. Ditto the 767 which does not have any airline customers any more.
The 747-8 might not. The 747 as a whole from the 70’s until 2004 has made plenty of cash for Boeing.
IMU 747 profits for the full type range ( i.e. after break even ) seem to be limited to
the middle/late 90ties up to about 2001?
only because Boeing was importing cheep Russian 7075 aluminium from line no 15 to 600+ then all the crack’s seemed to appear ware they should not in sec 41.
Who cares if it was aluminum from Cuba, Tunisia or Norway? My point is that the 747 program as a whole has made Boeing a lot of money. Cheap aluminum from Russia is irrelevant since people still bought them before and after the cracks you mention. EK has A380’s that need doors that need to be sealed and wing ribs (perhaps from cheap material) to be repaired yet they bought another 50.
The 748i was a knee jerk reaction to the A380. Whatever frames it could sell to carriers before they bought the A380 was a win win. The delays and budget overruns ultimately did it in and the 748i couldn’t come up for air fast enough. Now both of them are neck and neck fighting for last place.
There is nothing wrong with the Boeing approach BUT it is not a prudent accounting process. It is relying on nothing else changing over the life of the programs which might affect future revenues and costs. Thus there is additional risk in the Boeing numbers.
I think the stock could get a nice bump when McNerney retires. Muilenburg will be a much more effective leader in my humble opinion.
Well, McNerney is planning on working past 65, so that may not happen for some time! Assuming he doesn’t get his ass fired for his “cowering employees” comment!
Several risks for Boeing profits in the future :
– the dollar / euros rate : the era of the weak dollar will be ending one day or another (by the way, the dollar is the best subsidy for Boeing)
– the 747-8 fate
– the KC46 program
– the A350 threat to 777 sales (at least till 2020 and the 777X).
– the A330 neo low price which will force Boeing to keep 787 price low (how long the 787 losses can be deferred ?)
Some people are still stuck in the past with Airbus problems with the A380 and A400M program. They forget that all the losses have not been deferred at Airbus.
It would be a huge mistake on the Boeing side to underestimate Airbus commercial and financial strength.
The $1.1 billion production losses on the 787 program is the interesting one for me. Significant because production is operating at full rate now. At nearly $40 million loss per plane produced they can only bring the loss down is by making the same number of planes more efficiently or (eventually) by delivering them at a higher price. According to Wikipedia, they were selling the 787-8 for about $160 million in 2007 (originally $120 million). As the bulk of the current backlog was already sold by then at the normal large discounts, I can’t imagine Boeing will make a profit on any of the 787-8s in that backlog.
Looking at the numbers, order books and portfolio’s the widely accepted assumption Boeing dominates the twin aisles segment is nothing more then a assumption.
Can you share how you arrived to this conclusion?
Rotate, it is likely in the 2015-2020 period the A330 production will remain at 10 per month, while A350 production climbs to 10 a month around 2018 too. A380s will be produced at 3-4 per month.
777 Production will take a hit in the ’15-’20 period while customers wait for the 777X and introduce A350s, going to 5(?) a month. 787 production will hopefully grow, but estimations on 787 have consistently proved over optimistic for a decade now, and continue to be. 747 production rates in the ’15-’20 period? ..
That is why I think the general “but Boeing dominates the twin aisle segment” is more an hopeful assumption then it will prove reality this decade. But this will take some time to sink in.