Boeing’s cash surge a rare bright spot amid industrial woes

By BLOOMBERG

CHICAGO • Boeing Co revved up cashflow and raised its profit forecast, soothing shareholder concerns over an operating loss in its defence business and production stumbles with the company’s best-selling 737 jets.

Free cashflow jumped 37% to US$4.1 billion (RM17.22 billion) in the third quarter (3Q), more than double analysts’ estimates. The planemaker also reported higher than expected ear nings, raised its annual profit forecast and predicted that sales would reach a record US$100 billion.

The results underscored the strength of Boeing’s commercial-aircraft business as the world’s largest aerospace company benefits from booming global demand for air travel and a US$491 billion order backlog.

For now, at least, investors looked past an operating loss at the defence business after Boeing booked US$691 million in accounting charges for two high-profile contract wins from the Pentagon.

“There is a lot going on under the hood in Boeing’s 3Q, but with regard to what the market cares about most — that Boeing generates a lot of cash — the results delivered,” Seth Seifman, an analyst at JPMorgan Chase & Co, said in a note to clients on Wednesday.

The shares climbed 3.2% to US$361.30 at 12:20pm in New York yesterday, the biggest gain on the Dow Jones Industrial Average. Boeing rose 19% this year through Tuesday, bucking a sell-off that afflicted other industrial titans such as 3M Co, Caterpillar Inc and DowDuPont Inc.

Cash Focus
Investors have increasingly focused on free cashflow since Boeing earnings are adjusted for pension expenses and the company has pledged to plow an equivalent amount into shareholder returns. But the cash bonanza’s durability was called into question as the company failed to boost its fullyear outlook for the measure.

During the 3Q, Boeing spent US$2.5 billion on its own stock and paid US$1 billion of dividends. The results were bolstered by a US$412 million onetime tax benefit related to an audit in 2013 and 2014. The company also got a cash gain from a decline in the balance of inventory and factory costs for the 787 Dreamliner, which dropped US$667 million to US$23.6 billion.

Adjusted earnings rose to US$3.58 a share, Boeing said in a statement. Analysts had expected US$3.47, according to the average of estimates compiled by Bloomberg. Revenue climbed 3.8% to US$25.1 billion, topping the US$23.9 billion analysts had predicted.

Jetliner Strength
Investors had held low expectations for the 3Q after supplier strains left dozens of unfinished 737 jetliners, the company’s main source of profit, parked around a Seattle-area factory.

But the results underscored strength in the commercial airplane business despite the headline-grabbing factory snarls, which have forced the company to spend more to complete dozens of the undelivered narrow-body aircraft.

Boeing reaffirmed that it would deliver between 810 and 815 airliners this year, despite a slowdown earlier in the 3Q. The Chicago-based manufacturer had handed off 568 commercial aircraft to customers as of the end of September.

Operating margin for the commercial division, which generates about two thirds of Boeing’s sales, rose 3.4 points to 13.2%, moving toward the mid-teen goal set by CEO Dennis Muilenburg. The measure was 13.3% for the company’s global-services business.

Defence Charges
While the defence unit posted a 13% sales gain, it posted an operating loss equal to 4.3% of revenue as a result of one-time accounting charges.

The division took a US$64 million write down on the KC-46 military tanker, which is already two years behind schedule. Then there was a US$691 million forward loss recorded for two military contracts Boeing won in September: A refuelling drone for the US Navy and a next-generation trainer jet for Air Force pilots.

The company said there’s a deliberate strategy behind bids such as its T-X offering, which was US$10 billion below the Pentagon’s estimated costs.

Boeing sees a chance to dominate a potential global market of 2,600 planes. Total sales associated with the two military aircraft could be valued at more than US$60 billion.

“Think of these as investments in a production run that will begin in the early 2020s and run, potentially, for decades,” Muilenburg said on an earnings conference call on Wednesday.

But to make the strategy pay off, Boeing will need to stick to deadlines and budgets — areas where it’s struggled with military programmes such as the much-delayed tanker.

Lockheed Rivalry
Muilenburg’s counterpart at Lockheed Martin Corp, Marillyn Hewson, spelled out the risks.

Matching Boeing would have meant absorbing US$5 billion in losses, “an outcome that we do not feel would have been in the best interest of our stockholders or our customers”, she said during an earnings call on Tuesday.

Bolstered by the cash spigot from its jetliner sales, Boeing is willing to take the long view.

“Boeing’s leveraging the fact that they’re generating a lot of cash from the commercial part of the business,” said Ken Herbert, an analyst with Canaccord Genuity. “That’s a clear advantage versus Lockheed and Northrop Grumman.”