The closely watched 2015 cash flow guidance is more than $9bn. Revenue for 2014 was nearly $91bn and is forecast to pass $94bn this year.
Boeing will repurchase up to $12bn in stock over the next two-three years.
Initial analyst reaction:
We reiterate our Underperform rating, $101 target and recommend investors sell shares following BA’s 4Q14 earnings, where (1) BCA margins missed, (2) 787 deferred costs of $26.1B exceeded our expectations of $25.4B, and (3) BA’s 2015 implied FCF guidance of ~$6.2B remains a questionable target due to seemingly poorer operational performance in 2015. 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 $26.1B deferred costs were above our expectations. We see 2% upside and -37% downside from current levels under our best/worst case scenarios.
The closely watched 787 deferred production balance increased to $26.15bn from $25.19bn last quarter. That $960mn sequential increase compares to our estimate of $726mn, and we believe is likely higher than most investors were anticipating. It is also larger than the $947mn sequential increase experienced last quarter.
Q4 core EPS and FCF in particular were better than expected, as was 2015 guidance. Q4 FCF exceeded our estimate by over $2 bn and 2015 guidance for > $6.2 bn should be well received. While this might represent a modest decline from $6.6 bn last year, 2014 FCF was much stronger than expected and initial guidance is typically conservative. We came into today at ~$7.3 bn for 2015 and expected initial guidance closer to ~$5 bn.
However, the quarter was not unblemished. 787 deferred production increased by $960 mn, about unchanged from growth in Q3 and suggests management could have difficulty capping the deferred balance below $27 bn, as it indicated last quarter that it intends to do. Still, 787 unit costs are difficult to forecast quarter to quarter, and the improvement we are looking for could come suddenly at some point rather than as a gradual ramp down. In addition, the solid 2015 cash flow guidance suggests confidence on lower 787 unit costs.
Weaker than expected core BCA margins are another concern. We estimate the margin ex R&D and ex 787 and 747 was ~16.5% in Q4, or 150 bps below our estimate. This is the second consecutive miss following a series of very strong results and calls into question the durability of some Partnering for Success gains. 2015 guidance for BCA margins is 9.5-10.0% and this has typically been an area of conservatism. We came in looking for 11.1% this year but we will need to re-evaluate this in light of 2H14 performance.
Boeing introduced 2015 Core EPS guidance of $8.20-$8.40 (Us: $8.45; Consensus: $8.50) on 4-6% sale growth. More importantly, the implied FCF guidance is more than $6.2B. Going into the quarter, our view was that any number above $6B would be viewed positively. BA implied $1.0B-$1.5B of quarterly buyback over the next 2-3 years; the 2015 share count guidance suggests the aggressive end of the range, we believe.
787. Deferred costs for the 787 increased $960M to $26.15B – comparable to Q3’s $947M sequential increase. This means the per unit increase in deferred was essentially the same as in Q3; we think investors will be disappointed with not seeing a slowdown in the deferred costs.
In all, with the 2015 FCF outlook at-or-above consensus expectations, we anticipate a positive reaction in BA shares despite continued growth in the 787 deferred balance.