Boeing Profit Tops But Faster Output Slashes Cash Flow
Boeing's third-quarter earnings and revenue beat analyst estimates Wednesday on higher commercial plane deliveries, but a production ramp-up raised concerns about cash flow and hopes for shareholder payouts.
The aerospace giant's Q3 core earnings jumped 19% to $2.14 per share. Analysts polled by Thomson Reuters expected $1.97. Revenue climbed 7.5% to $23.8 billion, above views for $23 billion.
"Boeing's cash is tied up in inventory," Neal Dihora, a senior equity analyst at Morningstar, told IBD. "When you deliver goods, you can take them off your balance sheet. But Boeing has chosen to increase production rates, which requires you to have more inventory.
Shares closed down 4.5%.
Cash Flowing To 787
In January, Boeing (BA) raised the 787 production rate to 10 per month, up from seven per month in 2013. But costs for the new fuel-efficient plane haven't fallen as expected, and CFO Greg Smith said Q3 cash flow was affected by a build-up of parts inventory for 787-9s.
Operating cash flow before pension contributions fell 61% to $1.68 billion in Q3. Boeing expects "very strong cash flow" in Q4, but analysts aren't so sure.
Sterne Agee analyst Peter Arment said in a research note that he sees "increased bear calls for higher 787 costs and lower cash flow estimates.
The production rate issue comes just weeks after Boeing announced it will boost 737 output to 52 per month in 2018 from 42 currently as narrow-body demand increases.
But this summer, Air Lease (AL) President John Plueger called narrow-body production rates a "major concern" because suppliers are reaching their capacity, and Canaccord Genuity analysts have called such production increases unsustainable.
Morningstar's Dihora said higher output could be "borrowing from later sales" and noted the potential for cancellations. Still, he acknowledged the industry remains healthy and that cash flow is more an issue for shareholders expecting payouts.
Robust Commercial Demand
Boeing secured deals for 501 new commercial aircraft in Q3, and backlog rose 11% during the quarter to $490 billion with more than 5,500 orders.
Commercial airplane revenue rose 15% to $16.1 billion, though operating margins narrowed to 11.2% from 11.6% on deliveries of lower-margin 787s and 747s.
The company raised its full-year EPS outlook by 20 cents to $8.10-$8.30, but the midpoint is still below the $8.28 consensus.
Defense, space and security sales fell 2% to $7.9 billion amid Pentagon spending cuts.
Space has been a bright spot for Boeing, which won a contract last month for NASA's space taxi program to take astronauts to the International Space Station along with Elon Musk's SpaceX.
Also on Wednesday, General Dynamics (GD) reported quarterly earnings that topped estimates as aerospace sales, which include its Gulfstream business jet and Jet Aviation units, rose 6.4% to $2.3 billion. But overall revenue missed.
The business jet industry took a hit during the recession, but earlier this week Honeywell (HON) forecast global deliveries of up to 9,450 new business jets from 2014 to 2024, up from a prior forecast of 9,250.
Northrop Grumman (NOC) also reported earnings and revenue that beat estimates and raised its full-year EPS outlook.
Earlier this week, Lockheed Martin (LMT) reported Q3 EPS that topped analyst estimates, but its sales fell below views and it sees 2015 sales declining.
