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:
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.
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.
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.
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.