Initial analyst reaction to Boeing 1Q earnings

April 24, 2019: Initial analyst reaction to Boeing’s 1Q2019 earnings, which were impacted by the grounding of the 737 MAX two weeks before the engine of the quarter, was positive.

Pre-market trading was initially up more than $6; at this writing an hour later, this eased, coming off slight to being up just under $6.

Here is the initial reaction from analysts:

Bernstein Research

Boeing reported Q1 core EPS of $3.16/share, vs consensus of $3.20 and our estimate of $2.83, driven by mix benefits in Commercial, despite a halt in 737 MAX deliveries in March. A lower tax rate also benefited EPS. Revenues of $22.9 bn were in line with our $23.0 bn estimate and consensus of $22.9 bn. Core operating margin was 8.7%. Exhibit 1 compares the results to consensus and our estimates, and Exhibit 2 summarizes segment performance in the quarter. But, this comparison at a company level is of limited importance at this point, given uncertainty around the timing of the MAX return to service.

787 deferred production declined by $938m, or $26.1m per airplane, indicating a substantial improvement in cash margin for the program.

Guidance for 2019 has been suspended, pending clarity on when 737MAX deliveries can resume. This should not have been a surprise. The most important issue for the company now is the timing of when deliveries can restart. We expect to hear a focus on the safe return of the MAX on the earnings call.

Boeing repurchased 6.1m shares in the quarter prior to mid-March for $2.3bn. It also paid out $1.2bn in dividends, which is an increase of 20% over last year.

Investment Implications

We rate Boeing Outperform, target $449. We see the recent pullback as an opportunity to take a position in a long-term free cash flow story that should remain intact once 737MAX issues are sorted out. The risks for Boeing would be if there is a further problem with the MAX (we see no evidence of that) or if politically-driven delays extend well beyond the summer.

Cowen & Co.

Q1 “core” EPS of $3.16 was in line with consensus but topped our $2.75 estimate. The beat reflects higher segment EBIT (added 46¢) and lower taxes (added 30¢), which outweighed higher below the line costs.

Revenues of $22.9B (-2%) were on track as better than expected Defense (satellites / weapons; despite lower C-17 volumes) and Global Services (+17% y/y including KLX acquisition) outweighed soft Boeing Commercial (lower 737 outweighed favorable mix).

BCA margin of 9.9% was ahead of our 8.5%E. Favorable variance reflected (1) lower than est. R&D spend ($564MM of $2.7B+ estimate for full year 2019 – added 50bps) and (2) higher 787 margins. These outweighed $1B higher costs for the 737 rate adjustment.

787 amortization of deferred production costs and tooling improved to $1.04B, up from Q4’s $753MM and Q3’s $782MM. Core unit deferred production increased to a very impressive $30.7MM/unit vs. $19.3MM in Q4.

Defense margin of 12.8% beat our 10.5%E on gains from asset sales, which more than offset unfavorable mix. Global Services (14.1% vs. 15.2%E) came in light due to mix.

Free cash flow of $2.29bn topped our $1.2bn estimate on (1) very impressive $1.044m drop in 787 deferred/tooling costs and (2) hefty $1.9bn lift in advances. These outweighed a $5bn spike in commercial inventory (ex 787 deferreds) likely a build in 737 & 777X inventory. Share repo totaled $2.3bn (6.1m shares) – all before the Ethiopian crash in mid-March.

Goldman Sachs
Bottom Line: BA 1Q19 P&L results are relatively in-line with consensus, though Street estimates have been a moving target since the MAX grounding and have been reduced over the past two months. Free cash flow is $1bn better than consensus and our estimate, and better than the company’s guidance for 1Q prior to the MAX grounding, with 787 deferred better than our expectation, implying a fairly large increase in the 787 cash margin, and accounting for approximately half the upside. The company has stated that its existing 2019 guidance does not include 737 MAX impacts and that it will update it at a later date.
Details: Reported core EPS of $3.16 compares to FactSet consensus at $3.19 and our $3.79. Revenue matches consensus and is 2% below our estimate with downside in both BDS and BCA. Segment EBIT is 12% worse than our model, driven by a 9.9% BCA margin, reflecting earlier and larger 737MAX impact than we anticipated. The 12.8% BDS margin is 180bps above our estimate, but has an unsized gain on a property sale. Segment EBIT is the majority of the miss vs. our model, with a $(250)m/$(0.37) customer financing impairment in corporate and tax and other help of $0.45 nearly offsetting each other. Free cash flow in the quarter of $2.3bn is higher than our $1.2bn estimate. 787 deferred production of $22.0bn (down $938m vs our $572m estimate) accounts for approximately half the beat. Boeing suspended 2019 guidance in light of uncertainty surrounding 737MAX certification.
JP Morgan

Boeing’s decision to pull guidance is no surprise, given how critical the 737 is to financial performance and the uncertainty around when MAX deliveries resume. We’ve written about the potential financial impact of the grounding, but we do not expect much granularity on today’s call, for which the commentary on the first page of the press release likely sets the tone. While the upcoming earnings call is formally a financial discussion, we expect many others to listen, and management will likely focus on the broader issues of safety and its work to return the MAX to service with the confidence of its customers, which is appropriate, in our view.

P&L cost of 737 grounding. Boeing noted $1bn of added cost to the 737 accounting quantity following the rate reduction and we estimate that this might lower the 737 margin by ~50 bps for now. Where the 737 program margin comes out once the plane is back in service and deliveries are ramped will be a question for the future calls.

Cash flow cost of 737 grounding. We do not expect much detailed info here but to level set, we have estimated, based on several assumptions, that each month the MAX is grounded with the current production results in a $1.5bn shortfall vs Boeing’s prior cash from ops guidance for $17.0-17.5bn. This means cash from ops could be breakeven in 2Q19 with no deliveries.

Q1 FCF was $2.3 bn. This was $1.7 bn above our reduced estimate. The company made good progress on 787, burning down the deferred balance by $940m vs our model for ~$635m and customer advances aided cash flow.

Q1 core EPS of $3.16 was nearly in line with our $3.20. Margins in Commercial (35c miss) were impacted by the reduced 737 margin rate. Defense sales and margins beat, driving 40c of upside, aided by an unquantified property sale gain. Services missed on margins and unallocated items were a 50c headwind, including a customer financing charge. Tax, on the hand, was a tailwind.



31 Comments on “Initial analyst reaction to Boeing 1Q earnings

  1. It appears that Boeing’s decision to rush the MAX is being vindicated. The ‘rush job’ garnered the orders and the airlines are now tied in because of contracts and a lack of alternatives. Note the lack of concern in all of the guidance to what is a significant and traumatic event within the company.

    There appears to be little or no concern relating to the longer term impact of this tragedy on the willingness of airlines to buy the product and the flying public to fly on it. This is because either the guidance places no value on damage to perceived engineering integrity or that Boeing is presently immune from such matters given the market as it currently stands.

    • The reality is that investment community has a long history of events and consequences.

      Long term they are almost 100% certain to be right.

      Boeing will correct the MAX, airlines will take it and as long as it has a good history afterwords, the impact will be slight.

      Yes there may be a few lost campaigns, but not likely.

      Airbus cannot fulfill any more than 600 a year. They are over committed. P&W stated there is no way short term they could ramp up production of the GTF and CFM has its issues. IE the supply chain can’t ramp up much and certainly not double.

      Its not the car industry that can ramp up and down in short periods. Oddly 30,000 or so people are killed a year in the US in vehicle crashes and it gets very low level attention.

      As for the loss of life, they do not care nor is it their job to care. Any responsibility is detached, their urge to profit over conduct. Not how I would run my life, but then I am not an Investment firm nor employee.

      If we want change then its on the legislative level and good luck with that.

      • Are you sure about the Airbus A320 series 600 per year capacity?

        They said this at the opening of the new automated FAL at Hamburg less than a year ago.( Jun 2018)
        “The addition of a fourth assembly lines comes as Airbus prepares to boost the production rate of its A320 narrowbody family to 60 aircraft a month by mid-2019, from about 50 aircraft a month currently.”
        My maths says thats 720 py. What does your maths say , and when will ‘mid 2019’ happen on your calendar?

  2. There appears to be little or no concern relating to the longer term impact of this tragedy on the willingness of airlines to buy the product and the flying public to fly on it.

    Are you implying that the MAX will still be unsafe after the fix?

    • I don’t think that is what sowerbob was saying. It was “willingness of airlines to buy the product and the flying public to fly on it.”

      I choose Southwest whenever I can and I must admit that after the MAX is flying again I’m going to be extremely interested to know if I am flying on a MAX. When I do I’m going to think of all those people who died on this type of plane. I’ll wonder what frame of mind they were in when they boarded, and what was their first indication that something was wrong. I’ll wonder what I would do when it became clear that the flight was not going to end well.

      When I was much younger I read Nevil Shute’s novel “No Highway” and for a long time afterwards I would wonder if the plane I was flying on might have a previously undiscovered fault.

      So yes, I believe that some proportion of the travelling public will prefer to fly on alternative planes even after the MAX is declared safe. For once I think I might agree with the President. When relaunched the MAX might be better off with a new name.

  3. Sowerbob, surely you have some indication you might cite of a flying public unwilling to fly on the MAX after it returns to service based on your hysterical commentary?

    If they’re not restating the year’s guidance, and analysts are predicting a 10 billion dollar free cash flow impact, it’s probably because it’s unknown. That’s what public companies have to do with unknowns; refuse to quantify/predict them. We just went a whole year in the US without a fatal crash in civil aviation (Boeing or others), I don’t think the airlines or the greater “public” are about to panic due to MCAS, and resort to boat/car/rail travel due to the “engineering integrity” at Boeing.

    Give me a break, let’s stop devolving discussion on anything Boeing related to middle school melt downs.

    • Hey please, I was not looking to be hysterical in the slightest, rather to reflect the rational view of the financier. Simply put I was saying that the crashes are assumed by them to have little or no impact on future decisions by either airlines or the flying public. I was focusing on perception not the product. I thought that was clear.

      I think you are reading into my comment something that is not there. An observation of the status quo and not an opinion if you wish!

    • The AoA reading was 75° with the Ethiopian crash. MCAS acted on it even though no civilian airplane can do that.

      Did the pilots see it. No, that’s an optional extra. You need to pay if you want to see the AoA reading on the flight deck display.

      This then comes to school. I’ve seen harder questions asked of 14-16 year olds. Specifically is a AoA of 75° possible? Clearly Boeing think it was for MCAS acted on it. No Boeing it isn’t.

      LNA talked about average pilots. Let’s talk about average engineers or average managers. If engineers or managers at Boeing think that a 75° AoA is possible then they should only be allowed to stack shelves in a super market.

      Remember the pilots couln’t see it. That’s optional extra. They did call it, for they did call left alpa vane.

      The question is why did MCAS act on something that wasn’t possible. School boy stuff. If Boeing engineers/managers can’t get school boy stuff right… well there are many other questions, many I consider to be school boy stuff.

    • Easy to assume this is due to the current MAX issues. But it may just be because Boeing does not have a competitive product in the A220-100 size.

      • ” Boeing CEO denies any ‘technical slip‘ in 737 MAX crashes, as grounding cuts into profit and cash reserves ”

        Sure glad the CEO really aid what really matters- profit and earnings ” And of course the real problem with MAX was the’ dumb’ pilots- and NOT any kind of ‘ technical problem ”

        Using a single non compared sensor to drive a major flight control without notice or documentation , and changing numbers presented to FAA etc re .6 degrees to 2.5 degrees in 10 seconds is not technical ??

        IMHO that is correct — NOT technical – it borders on Criminal !!

    • This makes perfect sense for South West. Given the size of their fleet and the 737MAX unknowns, management needs to show they are considering alternatives.

      Talking to Airbus about 200/500? will keep the 737MAX price down for any future orders. With the 320neo sold out, the Airbus 200 is the only North American alternative for the next few years.

      With the 787 Charleston QC issues and the Tanker FOD issues as well as 737MAX, Boeing is no longer the safe, reliable supplier it once was.

      If the foreign certification authorities take their time and do a thorough recertification, who knows if other issues will be found, which were overlooked in the rush to meet Boeing’s EIS? Who knows if these delays and any leaks and speculation in social media about what is causing them, will lead to 737MAX passenger avoidance?

      • Although, like Scott says “I’ll believe it when I see it.”

        It would actually make sense for South West to look at the A220-300 the 737-700 makes up the bulk of their fleet, and has around the same number of seats as the 220-300.

        South West is big enough to support two aircraft types, and could play AB off against BA very aggressively. If they are clear that they’re happy with A220 for a 700 replacement, BA would be under considerable pressure to give them a great deal. AB would love a big sale to South West, they’d be very aggressive if aircraft numbers were in the 100s.

        From a business risk point of view, having half the fleet AB, and the other half BA would certainly protect them from a potential existential issue like a 3 to 4 month grounding of your entire fleet.

        If the 737 MAX problem had only happened 5 or so years into the future, imagine the impact on an airline totally dependent on the type.

        I would be surprised if Ryanair, Air Asia, Easyjet etc. are not evaluating the risk of operating just one aircraft type.

        • I get your point, but the risk is still enormous if you have even half your large fleet of one type.
          What airlines have relied on was Boeing’s ‘too big to fail ‘ status and it’s clout with the FAA. Concorde was pulled from the air after it’s first and only fatal crash and the DC10 that lost it’s engine from a maintenance error was also pulled from air. You can’t say it’s just coincidence that no Boeing apart from 787 hadn’t had any other significant issues that had led to crashes.

          • ‘What airlines have relied on was Boeing’s ‘too big to fail ‘ status and it’s clout with the FAA.’

            What airlines relied on was a large pool of trained pilots and a safe, reliable 737 whose running costs were in line with the alternative. When the 320neo was launched, American and other airlines saw the running costs would be better. Keeping the pilot retraining costs and 737MAX running costs in line with the 320neo and having an early EIS date, forced many of the choices Boeing made.

    • Philip:

      There is no disagreement on the MCAS Ver 1.0 .

      But in the controls world, there is also no difference in 25 deg vs 75 (some caution there)

      Think of it as an older cruise control system.

      You go uphill, you loose 5 mph and the throttle is all the way to the floor.

      You loose 10 mph, there is no reaction left. Max nix.

      The question is not 25 deg, but that should 75 deg be written into code as Unreliable (impossible to do) and be ignored?

      That is a tough one as an aircraft can go 75 degree up nose though its highly unlikely. They can also go upside down (rare but it has happened) and you get a negative AOA that would then go the wrong way.

      Backk when I started, we had relay and pneumtai logic system and wha tyou could do without insane large panels was limited. So the possiblites were limited.

      With software, the possibility are endless.

      So that opens up, well we can do 100 different things here. You then have to choose out each one and try to follow a logic train to what the implication are.

      I also do not know if there are inherent issues with ignoring certain values in a package like that, the coding is going to be complex.

      On the other hand MCAS coded right would have been relativity simple and none of the possibles really matter.

  4. Failures happen.
    Pilotes are expected to deal with failures properly.
    That’s why there are still pilotes.
    Some pilots just do not respond correctly to a situation. That’s too bad.

    • The first duty of the planemaker is to make a safe plane. Boeing didn’t do that.
      You don’t throw the problem over the fence to the pilots and say deal with it, after having a one hour iPad conversion training.
      What you have just said is 1930s thinking, ironically when Boeing led the way with the first ‘modern airliner’ the Boeing 247 ( it could still fly safely with one engine out , a big advance over pilots just managing as best they could)

  5. Muilenberg is the darling of Wall St and therefore the darling of financial analysts. He raised the dividend by 20%, quarter on quarter, to buy off any shareholder revolt. Will it be enough? Don’t know.

    A 3 month review of MCAS amendments organised by the FAA with other regulators invited to take part in the review to show the world safety comes first. After which we can be all guaranteed that the FAA will fall into line. But will the rest of the regulators? As another commentator said, I will believe it when I see it.

    The only thing saving Boeing is a lack of competition in the narrow body market. But it is coming. The MC-21 and the C919 are on there way. They will be particularly attractive to all of those developing countries who shall be say are somewhat miffed at the way Boeing have dealt with the MAX crashes.

    There won’t be many new MAX contracts and I do think existing contracts are at risk. Will Wall St and analysts be saying the same next year? Depends on defence. The US government is already moving to shore up Boeing finances will lucrative defence contracts. But the commercial side of Boeing is very, very uncertain.

    As a side note, two 787s have suffered engine roll-backs. One powered by RR the other by GE. The RR powered 787 was on the ground, the GE powered 787 was airborne. No indication of problems with the engines. So Boeing software again!

  6. The “no technical slip” comments from Muilenburg during the call are hard to fathom. I don’t understand why Boeing has not pulled the plug on him given all the ham handed handling of this whole crisis.

    • All the power is in his hands . Chairman, President and Chief Executive. How can anyone even touch him

      • We’ll just have to wait and find out what the DOJ will discover with their ongoing investigation.

    • MCAS did what it was designed to do. keyhole view on MCAS: nothing wrong.
      IMU what we see is that Boeing will never “own” this and is very busy foisting off responsibility to other parties ( here the pilots that can’t argue back as they are dead ).
      you see the AstroTurfers posting here to that effect.
      At the end we will see another two accidents mainly caused by pilot error, a third world training deficiency. report closed.

  7. Please remember Muilenburg gave Wall St and anslysts a 20% pay rise by increasing the dividend by 20%. Why shouldn’t they be happy?

  8. Interesting to see such positive remarks, better than expected results and confidence.

    While the 737 is grounded, 777 at low rate production, 777X investments reached a max, the field is stuffed with unaccepted 767 tankers and the NMA was delayed for lack of commitment. The 787 was fine but has production quality issues and a 28B dept behind it.

    It confirms to me stockholders want good news, Washington wants good news, Boeing wants good news, congress wants so and the wider public wants good news on Boeing. And everyone gets served, win-win whatever happens. Just sing along, don’t ask.

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