Boeing earnings: margins up, cash, deferred costs disappoint some

Boeing announced its third quarter earnings today. Here is the press release. The initial analyst take:

Bernstein Research (Buy)
Boeing reported Q3:2014 core EPS of $2.14, well above our estimate of $1.89 and consensus of $1.98. Revenues of $23.8bn were above consensus of $23.0bnand our estimate of $22.9bn, and Commercial Airplanes margins remained strong at 11.2%.

Fully-reported Q2:2014EPS was$1.86, compared to our estimate of $1.78and consensus of $1.77.

The company raised2014guidanceforcore EPS to $8.10-$8.30from$7.90-$8.10, i.e., by
$0.20/share, and reiterated revenue guidance of$87.5-90.5 bn. Guidance for operating cash flow was raised to greater than$6.25 bn from ~$6.25 bn previously. Margin guidance at BCA is raised to ~10.5% from>10%, while BDS margin guidance remains steady at ~9.5%.

787 deferred production level of $25.2 billion is consistent with our model, but slightly high compared to Boeing’s target of a peak at roughly $25 billion in Q4. Deferred production costs for the 787 increased by $0.95bn in the quarter, compared to $1.1 bn in Q2. We estimate that continued progress at this rate should lead to deferred production peaking at $25.5-26.0billion. While this is slightly above Boeing’s original estimate of ~$25bn, we see it as consistent with our expectations and consensus. 787 cost reduction is central to the longer term cash flow story for Boeing.

Buckingham Research (Underperform)
We reiterate our UNDERPERFORM rating, $101 target and recommend investors sell shares following BA’s 3Q14 earnings, where (1) BCA margins had a slight beat, (2) 787 deferred costs of $25.2B exceeded our expectations, and (3) BA’s “new” CFO guidance of >$6.25B was not as high as we thought. A key element of our bearish BA thesis is that BA will lower 777 production rates due to weak widebody demand and the need to bridge the production gap with the 777X. We also see increased risk to 787 costs, as the cumulative $25.2B deferred costs were above our expectations. We see 20% upside and 27% downside from current levels under our best/worst case scenarios.

Credit Suisse (Buy)

787 Unit Deferred Production ~31.6M in Q3: Total deferred production increased to $25.189B (from $24.242B in Q2). On a unit basis, this equates to ~$31.6M per aircraft.
We think consensus had expected unit deferred to decline below $30M. However, we note that efforts such as pulling inventory forward all get counted in the quarterly deferred, which distorts the number upwards.

Sequential unit deferred improved ~$5.7M in Q3 (Q2 was ~$37.3M by our math).
That said, we believe a focus point on today’s call will be the path to peak deferred, and whether Boeing still expects to peak on deferred in early-2015

JP Morgan (Overweight)
Q3 was solid overall with a bottom line beat and higher guidance for core EPS and cash flow. However, the EPS beat was defense driven and not all of the news was encouraging, as there was a drop-off in the core commercial margin and 787 cash losses did not slow as fast as we had forecast. This could dampen the stock reaction.
Management raised core EPS guidance by 20 cents to $8.10-8.30 for higher BCA margins and higher sales at BDS.

Core EPS of $2.14 exceeded our estimate by 15 cents. BDS accounted for 10 cents with much of the remainder coming from a lower than expected tax rate.

BCA EBIT of $1.8 bn was just ahead of our estimate but higher than expected sales and lower then expected R&D drove the upside, while we estimate that the core margin (ex R&D, 747,and 747-8) dropped to ~18.3% from nearly 20% in 2Q14. Margins can be choppy quarter to quarter but the expansion here has been a key earnings driver and we will seek more info on the trajectory from here.

787 deferred production grew ~$950 mn, more than our estimate of ~$700 mn. The balance is now above the target of ~$25 bn where management has predicted it would stabilize near year-end with a quarter to go. While this is not encouraging news relative to expectations, it does represent further progress, and we will look for incremental color on the call. A key question will be how much of the Q3 increase was related to 787-8 unit costs as opposed to inventory build on the 787-9.

 

8 Comments on “Boeing earnings: margins up, cash, deferred costs disappoint some

  1. AND the cfo intimates the suggestion of expanded stock buybacks. Using what for cash? Most likely borrowed money. In a market primed and ready for a huge downward move.

    • IBM does the same , why not. Since 2000 IBM has spent $108 billion on share buybacks and only $30 billion on dividends according to NY Times. It only takes a few seconds to see who benefits most by higher share prices rather than dividend payments

  2. OK, there are 25bln USD “deferred cost”. Means Boeing has paid 25bln above the estimated average unit production cost. Just for my understanding: does that mean Boeing has to earn these 25bln USD on later B787s?
    http://www.boeing.com/companyoffices/financial/balsheet.html

    Further, they have increased inventory by 17bln USD. What is this? Half-completed aircraft? That would mean more than 100 B787 being currently in production.

    And that all while making profits? For me that sounds like a big barrel of dynamite which is likely to explode at the next downturn (which will come some day).

    • Inventory value appears to be materials _and_ accumulated cost associated to parts not yet delivered ( i.e. the terrible teens might each be worth a half Billion $ in the books. When sold this collapses down to $60 ..70m cash received from a sale. IMHO this is another nock where Boeing hides more losses. ( Properly booked inventory can’t gain more value than what it can be conservatively sold for )

  3. I think that 10 years after 7e7 launch, 150 aircraft down the line and still pushing out machines that cost more then they bring in, is a concern in anyone’s book.

    It seems to me a majority of the opportunistic, very averagely informed Boeing stock owners, that were jumping on any cheerleader like advice from Fool and Seekingalpha, has only recently discovered the deferred cost thing, the dark trick behind the always quaterly success story.

    The 787-9 seems a very strong, well placed platform for the next 5 years. It corrected the 787-8 on its weak points, a bit small, heavy and unreliable.

    The 738 and -8MAX seems the other cashcows, however the 777-8 and -9 are just too late. 2020 is too far behind the A350s. It should have been there in 3 years from now, 2017. Not another 3 years down the line.

    Same as with the 787, its EIS gave Airbus the opportunity to sell another 800 (!!) A330s while the 787 was developed and the 767 and 777-200ER outdone.

    Boeing IMO needs new leadership quick, with openess and honesty to the market, good long term strategy, restored labor relations based on mutual respect and understanding. I say Mullaly as president and 2 strong forty something leaders below him.

  4. I don’t mean to denigrate or pick a fight, but none of you guys understands Boeing’s numbers or have the faintest idea how to even look at them, and YOU ALL KNOW IT. But amazingly this shortage of knowledge and understanding has not led to a corresponding shortage of fast and loose comments from the usual places. “Borrowed money” for expanded stock buybacks? Inventory gaining more value than what it can be conservatively sold for? It’s magical how you guys maintain your production even while you have so little raw material to work with. Did we all tune in to the same earnings call?

    The concept of “deferred costs” is not some new thing that Boeing’s conspiratorial managers invented that hapless investors will soon learn about to their great surprise and dismay. Crack open your college accounting textbooks and you’ll likely find something written about it there.

    • Josef Escanini

      Talking of books, T.A. Heppenheimer’s book ‘A Brief History of Flight’ contains some intertesting comments that “managed earnings (AKA project accounting)”
      role played in the demise of Douglas Aircraft company in the mid 1960s – see below.
      “For decades Douglas Aircraft had followed the conservative practice of writing off development costs of new aircraft as they were incurred, accounting for them as expenses charged against current receipts. In 1963, amid the company’s reforms , it acquired a new financial offier, A. V. Leslie. He took the view that this standard practice produced big cuts in profits during development phases, along with artificially inflated jumps once cash from sales began to roll in. Managed Earning, by contrast, would delay reporting these expenses. It would treat them instead as part of the production costs, charging them pro rata against each DC9 to come of the line.

      The downside was that if the company reported a loss, the true loss might be considerably worse. Soon Lesie’s new practice, combined with stubbornly high labour costs, brought bad news. McGowen (Douglas CEO) had planned for an average loss of $1.15 million on each of the first twenty aircraft. This was normal: he expected the first planes would be quite costly to build but that manufacturing costs would drop as the program advanced down the learning curve. After twenty airplanes, the loss would drop to $400,000 on each plane, and prosperity would be just around the corner.

      It didn’t happen, Losses on the first twenty produced $10 million more red ink than McGowen had anticipated. And even after delivering more than fifty planes, each new one was bringing a further loss of $600,000. This meant that profitability lay somewhere off in the distant future. It would be very difficult to bring down costs, through the learning curve, to where the company could recoup its losses by means of sales volume.”

      To me the above ‘Douglas Story’ extract has many parallelisms to the Boeing situation today.

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