July 26, 2017: Boeing reported better-than-expected 2Q2017 earnings today. Initial analyst reaction is below.
The press release is here.
The earnings call is at 10:30 am EDT. The link is here.
The company raised 2017 guidance sharply (Exhibit 3), increasing Core EPS guidance by $0.75 (7%), GAAP EPS guidance by $0.60 (7%), and free cash flow guidance by $1.8 bn (21%) on a higher outlook for operating margins at BCA and BDS, lower tax rate (by 200bps), and lower pension expense and CapEx. Of the $1.8 bn increase in cash flow guidance, $0.8 bn reflects improved performance, $0.3 bn is from lower CapEx, and $0.7 bn results from a change in pension funding plans. The $0.60 EPS guidance increase reflects performance ($0.35) and tax & other items ($0.25).
787 deferred production cost (DPC) declined in the quarter, falling to $26.46 bn (our estimate $26.58 bn), from $26.99 bn in Q1. DPC thus decreased by approximately $16 million per airplane produced in the quarter, well ahead of our estimate of $12 million per plane.
We value BA at $140 based on ~10x our 2017E peak FCF/share of ~$14, implying ~12x our 2019E peak EPS of $11.00-$12.00. Historically, at the peak of the Aerospace cycle, the typical multiple is 10x-12x peak EPS. However, in late cycle investors value BA off of FCF rather than earnings. FCF multiples are typically 2x-3x below EPS multiples on a 1-2yr forward looking basis. We therefore use an 10x multiple on our peak FCF, based on 2x below 12x peak EPS (the high-end of 10x-12x). We see downside risk to our price target given we use the high-end of typical peak EPS, despite clear risk to EPS and FCF, and we only use a 2x discount to P/E (vs. the recent >3x P/FCF discount to P/E).
The company increased its full year 2017 “core” EPS guidance by $0.60 to now $9.80-$10.00. We estimate ~$0.30 of this increase was a lower tax rate, and $0.30 is better margins in both the commercial and defense (GS&S notably) segments. The company also raised its full year FCF guide to now $10.3B vs. prior guidance of $8.5B. The FCF guide increase reflects higher CFO of $1.5B, with lower capex of $300M. The company purchased 13.6M shares in the quarter for $2.5B.
Boeing continues to surprise on cost reduction, improving gross margins to over 19%, which is the highest in several quarters. Deferred production balances on the 787 declined by ~$16M per a/c in Q2/17, with the total deferred production cost balance at $26.5B, with an additional $3.4B in tooling and other non-recurring. The company is benefiting as the mix transitions to the 787-9.
Based on the improved free cash flow outlook, BA is accelerating its pension contribution to now $3.5B in 2017, which will basically eliminate the need for any mandatory pension funding through 2021. The company will be contributing 3.5M shares into the program, and will increase its planned share buybacks this year to now ~10M shares. As a result of the contribution, the company will see a $700M cash tax savings, which is reflected in the revised FCF guidance.
We expect a positive reaction to the results in the stock, but we remain cautious due to wide-body market risk, margin upside potential, and valuation.
Boeing delivered better-than-expected operating results in 2Q. Segment EBIT is better than expected in the quarter and in the revised outlook, though there is also tax rate, pension and working capital help in the earnings and free cash results. 2Q17 “core” EPS of $2.55 is ahead of FactSet consensus of $2.30 and our $2.37. Revenue is down 8% yoy and 1% below consensus; however, the segment margin is better-than-expected in both segments, driving segment EBIT 7% above our estimate. Tax rate was favorable by $0.13 vs. our model. Free cash flow of $4.5bn was above our $2.35bn estimate, though there was $2.5bn of positive working capital change in the quarter. Core EPS guidance and cash flow guidance were both raised, with both approximately half from operations and half from tax. The implied EPS guidance change from operations is therefore +3%.
Free cash flow guidance increased $1.8 bn. This higher guide reflects $1.5 bn more in cash from ops and $300 mn less capex spending. The cash from ops boost is aided by $700 mn cash tax savings based on accelerated pension contributions, discussed below, but the core $800 mn increase should be welcomed by investors. Boeing reiterated its guidance for cash flow to increase annually, even off this now higher base. Q217 cash from ops of $4,950 mn was well ahead of our estimate and benefitted from advances and tax.
BA reduced the 787 deferred balance by ~$530 mn. This is better than our estimate for $360 mn and signals continued acceleration of improving cash profitability for the program. This implies a solidly double-digit cash margin, and there should be supplier price step-downs to come in 2H.
Raising 2017 Commercial margins guidance to >10%. BA posted a 10.0% operating margin in BCA, 30bp better than our forecast, and raised full year guidance to > 10.0% from 9.5-10.0%. BCA margins are a watch item for investors, as Boeing has focused on cutting costs amid intensifying competition. The higher margin guide also suggests lower risk on tanker in 2H17.
Not to be sniffed at. If I were to quibble then the deferred production cost may be fudged and there is still a small matter of $26.5bn to go over the remaining accounting block of c800 aircraft. Can’t really see it happening unless we get some very helpful inflation in the next 5-10 years. FCF is impressive and is a strong reminder that Boeing is being highly successful in the present at getting tin (and plastic) out of the door.
@16M/ac they need to build another 1662 ac to get to zero. the would need to average ~$34M per plane to burn it off in the next 800 AC…. seems a bit of a stretch.
Errr the tech term is Composites, plastic is so pedestrian!
Agreed on all counts.
Not that I would not love to be able to screw up that good and still have people buying my stock, that is being bought back by Boeing – so what is the value of the stock ?
That sort of thing can hurt your brain.