Oct. 21, 2015: Boeing reported a strong 3Q2015, with good cash flow and above-consensus revenue. 787 deferred production rose but less than some analysts predicted, yet in-line with International Institute for Strategic Leadership. The press release is here.
The first take on results from some of the analyst community, ahead of the earnings call, follows. LNC’s Bjorn Fehrm will take a concentrated look at the 787 results in a later post.
Boeing reported Q3:2015 core EPS of $2.52, well above our estimate of $2.06 and consensus estimate of $2.22. GAAP EPS was $2.47. Revenues of $25.8 bn were above consensus of $24.7 bn and our estimate of $25.2 bn. During this quarter, the EPS beat was appeared to be almost entirely from strong margin performance in both commercial and defense businesses. Margins for Q3 came in well above our expectations.
The company generated $2.3 bn in free cash flow in Q3, on operating cash flow of $2.9bn, and raised guidance for full-year operating cash flow by $0.5 bn, to $9.5 bn. The free cash flow result is above consensus of $2.26 bn, but below our estimate of $2.89 bn. Even though the value is below our estimate, we see this as a positive result, particularly when coupled with the higher guidance. Free cash flow is a volatile quantity that tends to be largest in Q4. Boeing has historically been conservative on cash guidance and generally does not raise cash guidance in Q3. 787 progress is central to the improvement in FCF.
787 progress appears good; Q3 deferred production costs on the 787 program rose $577 million, which is less than the roughly $800 million we had expected in the quarter. Boeing reported total deferred production costs (DPC) on the program are now $28.3 bn, which is lower than the $28.6 bn we had estimated.
We rate Boeing Outperform with a target price of $196. We see the share price as driven primarily by Boeing Commercial Airplanes (BCA). From a cyclical standpoint, Boeing is in a strong position with its core commercial programs. We expect planned production rate plans to hold despite any cyclical concerns.
The 787 program has been progressing well through production after a very difficult launch. We see improved pricing and ongoing cost reduction on the 787 as central to the thesis, and there may be added upside from a reduction in supplier costs.
This was a strong quarter with very little to complain about. Among the positives: Sales and margins beat consensus. CFO was strong, despite a w/c headwind (within which Advances were only a minor source of cash). Guidance rose by 25-cents (less than the 30-cent beat, but we suspect there is still Q4 upside). Most importantly, 787 deferred production only rose $577M against expectations of ~$700M by our estimation (meaning unit deferred improved 27% to $19M). Finally, and as we predicted in our preview (see here: Calendar Q3’15 AeroDefense Preview), there was no 787 charge. Are we convinced that BA will fully recover an estimated $30B in peak deferred? No, but we see no need for a charge at this stage, especially if more orders can further extend the block. Book/bill was just 0.83, but we knew that going into the print, and the backlog is holding near record levels. One last point. There was no 777 rate cut. Some will view this as a positive, others will see a lost opportunity to remove an overhang. We are in the latter camp, as we think such a cut is needed to bridge to 777X, but also think that maybe Delta’s comments pushed that decision to the right.
Boeing delivered a solid quarter on several fronts. Most importantly, 787 deferred production growth (i.e. the amount of cash Boeing is burning building 787s) slowed to ~$575 mn from a pace ~$800 mn earlier this year. Guidance had been for it to remain at ~$800 mn, and mix was a headwind and yet it came down. There is still several years worth of wood to chop on 787; so, we would avoid over-interpreting a single data point; however, if Boeing is going to generate the cash that bulls expect then 787 must be the key driver and the company showed some modest but long-awaited progress in Q3. (Please see the variance table on page 2.)
Q3 core EPS at $2.52
BA reported Q3 core EPS at $2.52, above $2.11 UBSe and $2.22 consensus. Beat driven mainly by upside at BDSS (Defense) with 6% revenue growth vs our -3% forecast and 12.2% margins, well above our model at 10.5%. BCA margins in line at 10% vs our 10.1% estimate. OCF at $2.9B, right in line with our forecast, driven by improved 787 performance and lower overall inventories offset by lower customer prepayments. BA repurchased $1.5B in shares in Q3.
787 deferred grows $0.6B, now ~$28.3B
787 deferred production grew by $577M, below $790M in Q2 and below our ~$600M forecast, with balance now at $28.3B. We estimate deferred production per unit at ~$19M on ~31 aircraft produced, as compared to ~$25M in Q2, including roughly two thirds 787-9s. Q3 cash benefitted from ~$600M lower contracts in progress, ~$1.2B drawdown in BCA inventory (ex 787 deferred increase) offset by $900M receivables increase, $800M lower customer prepayments (advances and progress payments) and ~$450M lower accrued liabilities.
Raises core EPS and cash guidance
Core EPS guidance increased by $0.25 to $7.95-8.15 on higher BCA deliveries (now five higher at 755-760) along with higher BDSS revenue and margin guidance. FCF guidance raised to $6.7B from >$6.2B with OCF guidance now at $9.5B from >$9.0. We will look for more color during 10:30 am conference call.