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.