Jan. 25, 2017: Boeing today reported slightly lower revenues for 2016 vs. 2015.
Revenues were down 2% to $94.6bn vs $96.1bn.
Net profit was down 5% year-over-year, reflecting the lower revenues and after charges on the KC-46A tanker and 747-8 programs. Operating profit was $5.8bn vs $7.4bn.
Net profit under GAAP accounting was $4.4bn vs $5.2bn.
Boeing took a pre-tax $312m charge on the KC-46A in the fourth quarter. Charges are now approaching $2bn.
The full press release is here.
Note that officials will make a decision this year whether to increase 787 production to 14/mo by the end of the decade (see Highlights).
The initial response from analysts, before the earnings call, was positive.
Deferred production on the 787 program declined for its second consecutive quarter, to $27.31bn, from $27.52bn in Q3, a reduction of $215m, or approximately $6m per airplane produced in the quarter (i.e., unit margins are now approximately five percentage points higher than program margin). Boeing thus slightly beat its start-of-year goal of ending the year with the same deferred production balance it had at the start ($27.64bn, accounting for the $1.011bn write-down in Q2).
We rate Boeing outperform, target $191. We expect strong cash flow growth, driven by the production ramp on the 737 program and by the 787. Narrow body demand remains strong, but with some weakness on mature widebodies, which is well-known.
We maintain our NEUTRAL rating, $100 price target, and negative bias after BA reported 4Q16 results and issued its 2017 guide. Overall 4Q16 results were only slightly better than consensus expectations, adjusted EPS (for tax and other items) beat consensus by a penny. While BA’s 2017 core EPS guide of $9.10-$9.30 was $0.05 below consensus, the central focus for investors will be on the 2017 CFO guide – $10.75B. We expect BA shares to trade higher today, largely due to BA’s 2017 CFO guide coming in ~$550M above consensus expectations (~$250bn above expectations excluding outliers in consensus) and consistent with BA’s guide that it can raise FCF under any production rate scenario outlined. After today, however, we think BA has few (if any) actions remaining that could act as a positive catalyst for the stock. We continue to see downside risk and believe that sustained market pressures will continue to drive lower pricing and the potential for even lower widebody production rates.
|As we expected, advances were a $500m FCF headwind in 2016 and were a headwind for the first time since 2009. While 4Q16 advances were a $1.2B tailwind, we expect advances to continue to slow and not be the meaningful cash tailwind that it has been in the past. The 787 deferred production balance decreased $215m in 4Q16, from $150m in 3Q16, to $27.3B – slightly above our expectations for $27.2bn. As previously announced, BA bought back $500m of stock in 4Q16 bringing full year buybacks to $7.0bn.
BA ended the year with $473bn in backlog, down $16.4bn from the year ended 2015. As orders remain weak (specifically widebody orders) we expect backlog to continue to erode.
Revenue was in-line with consensus and our estimate. Adjusted segment EBIT margin was 60bp ahead of our estimate, with BCA 30bp above and BDS 150bp above. Free cash flow in the quarter was $2.23bn compared to $2.50bn in the year-ago period and our estimate of $2.25bn. 787 deferred production declined $215mn vs. our estimate of a $125mn decline. BA repurchased $500mn of stock in the quarter compared to $1.0bn last quarter, and $750mn in the year ago period.
We expect a positive stock reaction to the 2017 financial guidance released this morning. Cash flow is the focus here, as the forecast for cash from ops of $10.75bn next year is +$250m y/y and +$350m vs our forecast. Boeing had already guided to higher cash from ops, so this is not a complete surprise, but the increase comes off a higher-than-expected 2016 base, and, combined with lower capex, it yields 2017 free cash flow (FCF) guidance of ~$8.5bn, or ~5% above consensus. In 4Q16, headline EPS beat, but segment results were OK and cash flow was strong.
Targeting ~$8.5bn of FCF in 2017. BA has long maintained it would grow cash flow in 2017, and the company appears on track to do so. Cash from ops guidance of $10.75bn is better than our estimate of $10.4bn, and $2.3bn of expected capex drives their FCF guidance $500m above consensus. In Q4, Boeing generated $2.2bn of cash, $500m above our forecast.
BA burned down the 787 deferred balance by $215m. This shows continuing momentum for over a year now and puts BA at an $860m full-year run rate if management can maintain this pace through 2017. Lowering 787 unit costs is clearly the most important cash flow growth driver for Boeing going forward.