Boeing 2015 earnings: Good year, good forecast, shares plunge anyway

Boeing LogoJan. 27, 2016: Boeing posted solid financial results for 2015 and forecast a good 2016, but shares plunged in early morning trading on a forecast for fewer deliveries this year than last.

The press release is here.

Shares dropped more than 6% in pre-market trading, off $8 at one point. (Update: After the bell, the trade off exceeded 12% and more than $12.)

Goldman Sachs (Sell) had this initial reaction:

Boeing reported in-line 4Q results; while providing a mixed outlook. Adjusted 4Q segment EBIT matched our estimate. Initial 2016 EPS guidance is well below consensus, with the “core” EPS outlook of $8.15-$8.35 1) coming in more than a full dollar below consensus and 2) implying a yoy decline in adjusted EPS. Free cash flow guidance of $7.2bn is above our $6.4bn estimate. It implies 4% yoy growth in free cash. We think consensus may have been looking for both a larger cash flow beat in 4Q and a larger free cash growth rate in the outlook. Revenue guidance implies a decline in both Commercial and Defense revenue, including a decline in total Commercial units. The Seattle Times this morning reported that Boeing was set to announce a 777 rate cut. There is not one in the release; though the total delivery outlook is below that implied by all current production rates, by our estimation. 787 deferred production increased $201mn sequentially in the quarter, well below our $491mn estimate and the $577mn qoq increase last quarter.

We’ll note that deliveries might be off this year in part because of the weeding out of the re-work 787s that occurred last year. Deliveries were above production. There are remaining some re-work airplanes, the Terrible Teens. We expect Boeing to provide detail (or at least be asked about it) on the earnings call, which is at 10:20 EST today. The link to the webcast is here.

Additional initial analyst reaction:

Bernstein Research (Outperform)

Boeing reported disappointing free cash flow for 2015 of $6.9 billion versus our estimate of $7.4 billion. Furthermore, free cash flow guidance for 2016 of $7.2 billion is far below our estimate of $9.1 billion. While we expect Boeing to issue conservative guidance, as they had done for six years in a row before 2015, the 2016 guidance is much weaker than our expectations. Given that we see Boeing stock trading heavily on free cash flow, this outcome is clearly negative.

On the positive side, 787 deferred production came in nearly flat (up $201 mn) to $28.51 billion, which was better than our expectations. This is particularly important because we see the 787 cash flow improvement as the wedge that should drive higher cash flow over time. For this reason, we are particularly surprised to see the low cash flow guidance in 2016, as the 787 appears to be going according to plan.

Buckingham Research (Sell)

·         We think BA’s disappointing 2016 guide will be the focus today.

·         BA guided to 2016 sales of $93B-$95B, well below our $97.4B and consensus $97.3B.

·         BA 2016 core EPS guide of $8.15-$8.35 compares with our $9.00 estimate and consensus $9.41. BA guided 2016 margins to ~9% vs. ~8% for 2015.

·         BA guided to 740-745 commercial aircraft deliveries vs. 762 deliveries in 2015. Including the rate increases for the 767 and 787 at the end of the year, this appears to be a reduction of ~24-25 deliveries y/y. While there was no mention in the release, the lower deliveries could factor in a rate reduction on the 777 program.

·         BA guided to $10B in cash from operations for 2016 vs. our $9.5B estimate and well below $10.6B for consensus. We expected CFO to be a key focus item for investors. We also believe investors are used to BA beating its initial CFO guide by >$1-$2B.

·         Capex was guided to ~$2.8B implying FCF for 2016 of ~$7.2B vs. consensus ~$8.0B.

·         Advances slowed meaningfully in 2015. BA ended 2015 with a $1.19B benefit in advances vs. $3.15B in 2014. Slowing advances was a core piece of our thesis that consensus FCF estimates were too high.

·         4Q15 GAAP EPS, adjusted for a lower than expected tax rate, of $1.24 was below our $1.31 estimate and consensus $1.27 (which includes the $569M ($0.84/share) charge related to 747 production cuts).

·         Total 2015 sales of $23.4B was in-line with our expectations and slightly below and consensus $23.6B

·         BCA sales of $16.1B beat our $15.62B and consensus $15.94B, however operating profit of $566M ($1.14B and 7.1% margin adjusted for the 747 charge) missed our $1.5B and 9.6% margin.

·         BDS sales of $7.79B beat our $7.72B and operating profit of $963M (12.4% margins) beat our $668M (8.6% margin).

·         Deferred production on the 787 of $28.5B was above our expectations for $28.3B. BA originally noted they would be cash positive on the 787 in 4Q.

·         Cash from operations for 2015 was $9.4B in-line with consensus and below our ~$9.5B expectations.

Boeing bought back 5M shares in the quarter for $0.8B – in-line with their previous announcement on their new authorization program and an indication that buybacks are slowing.

Credit Suisse (Neutral)

ANTICIPATED SHARE REACTION: Negative. We expect BA shares to trade off given the below-consensus Core EPS guide of $8.15-8.35.  Relative to our $9.35 estimate, the key difference appears to be in BCA margin guidance of “~9%” which is 110 bps below our projection, largely on mix, 737 transition and slightly higher R&D.  Revenues of $93-95B are also below our $96B target.  We think 737 transition and Tanker are also factors here (aircraft built in 2016 but not delivered until 2017) as targeted unit deliveries of 740-745 are below the 767 in our model. Lastly, BA expects a 30% tax rate where we had 29%.

A couple of mitigating factors include nicely improved cash performance in Q4 on 787, with deferred rising only $200M, meaning that negative cash profit per aircraft in Q4 was only $6.7M vs the $19.2M last quarter.

Further, 2016 FCF of $7.2B is in line with our target, and even a little higher on a per share basis (~$10.95 vs $10.84 estimate) due to a lower guided share count of 655-660M shares.  Lastly, a 777 cut was not announced in the press release, although we would not be overly surprised if it comes up on today’s 10:30AM (ET) call, especially since it is unlikely to impact until 2017.

Wells Fargo (Market Perform)

** EPS SUMMARY. Boeing’s Q4 Core EPS of $1.60 was well ahead of our $1.16/consensus $1.24 due mostly to: (1) Defense (DSS) margin (12.4% vs. our 9.0% estimate, +$0.25 EPS), with particular strength in Military Aircraft (volume/mix) and Global Services (delivery timing/mix); and (2) Commercial Airplanes (BCA) margin (3.5% vs. our 2.3% estimate; +$0.18). Results include the previously-announced charge ($0.84/sh) for cutting 747 production.

** CASH FLOW. Q4 FCF of $2.5B was just below our $2.65B estimate, despite nearly a $1B increase in customer advances, due to a similar reduction in payables. As expected, Boeing repurchased $750MM of stock in Q4.

** ORDERS. Q4’s book/bill was a solid 1.18x, as BCA (1.34x) booked 321 net orders and offset DSS’s 0.87x.

** 2016 GUIDANCE. Boeing’s initial 2016 guidance for ”Core” EPS is $8.15-$8.35, up 6-8% y/y, and well below the consensus $9.39 (Us: $9.35). BCA unit deliveries are expected to be 740-745 airplanes, below 767-unit forecast, with BCA margin of 9% (Us: mid-10%). Implied 2016 FCF guidance of $7.2B is below the consensus $7.9B (Us: $8.0B).

** 787 DEFERRED. Deferred costs for the 787 increased $201M to $28.5B – a deceleration from Q3’s $577M increase. We estimate that on a per-unit basis the deferred cost increased was $6.7M (vs. Q3’s $19M). This improvement should give investors more confidence in Boeing’s ability to get the 787 program to positive cash generation.

** CONCLUSION. In all, we expect a negative reaction in BA shares to the disappointing 2016 delivery/margin/EPS guidance. We suspect lower aircraft pricing due to lower price escalation is a factor in the less robust BCA margin outlook. On the other hand, the 787 performance for deferred costs is encouraging.

 

4 Comments on “Boeing 2015 earnings: Good year, good forecast, shares plunge anyway

  1. Looks like Muilenburg is cleaning up the mess and getting the bad news out of the way.

    A good thing even if it hurts short term.

    Longer term of course is the spending money on shareholders like a drunken sailor. You eat your seed corn and then you starve.

    • Yep. Boeing needs to drum up the talk and launch the new aircraft family from the A321 to the A338 to show they are reinvesting for future decades.

  2. Good news on 787 but I still can’t see 787 paying off the deferred+initial production 787-10 in the 900? remaining in the block, that’s 30M+ and interest an airframe.

    It looks like advance payments made last 15 months are now coming home on the 2016 bottom line. Maybe a B777 rate announcement might provide clarity for the market, B shares are in free fall.

  3. The share price plunged because of uncertainty, not actual figures.
    The market will want the full story regarding all models, and must remember, the share price reflects what happens in other divisions, not just Commercial Aircraft.

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