Boeing Stock Facing Short Term Weaknesses Coming Out Of Q1 Earnings

  • Boeing has topped revenue estimates in its Q1 2016 results thanks to robust performance by its defense segment.
  • Boeing's commercial unit, however, has continued to show weakness.
  • Boeing's short/near-term outlook remains unfavorable.

Boeing Co (NYSE:BA) has reported mixed Q1 2016 results that crushed revenue estimates but falling short of earnings expectations. Boeing reported first quarter revenue of $22.63B, up 2.2% Y/Y and $1.19B higher than the consensus on Wall Street. The Street actually expected Boeing to post a small revenue decline for the quarter. Meanwhile, core operating earnings of $1.694B or non-GAAP EPS of $1.74 (down 12% Y/Y), was $0.09 lower than the consensus and compared poorly with operating earnings of $2.132B or non-GAAP EPS of $1.97B a year earlier. On a GAAP basis, Boeing posted earnings of $1.788B, down 11% Y/Y with GAAP EPS coming in at $1.83, down 2% Y/Y. Boeing attributed the lower-than-expected earnings to a $156M ($0.24/share) after-tax charge that it took on its KC-46 Tanker program ''to maintain schedule with concurrency between late-stage development testing and the transition to initial production.''

Boeing's operating margin was down 120 basis points, to 7.9%, compared to a year ago.

Operating cash flow, one of the company's key growth metrics, was up $88M to $1.231B compared to a year ago. Free cash flow clocked in at $483M compared to -$486M posted in the year-ago comparable quarter.

Boeing finished the quarter with an order backlog worth $480B with 5,700 commercial airplanes on the order book. Defense, Space & Security backlog was $56B at the end of the quarter with Boeing saying that 37% of orders came from international customers.

Boeing Q1 2016 Segment Performance

  1. Boeing has the robust performance of its defense segment, aka BDS, to thank for the strong beat on the top line. Defense, Space & Security unit posted revenue of $7.956B up 19% Y/Y while the segment's operating earnings of $822M were up 11% Y/Y. The segment's operating margin fell 80 basis points to 10.3%

Boeing Military Aircraft (BMA) recorded revenue of $3.7B, higher year-over-year, on strong F-15 and C-17 deliveries.

Network & Space Systems (N&SS) posted revenue of $1.7B with a 8.5% operating margin.

Global Services & Support (GS&S) posted revenue of $2.6B with an operating margin of 13.3%.

  1. Boeing's Commercial Airplanes segment, aka BCA, did not perform as well as the defense unit. The segment posted revenue of $14.4B, down 6% Y/Y with operating earnings of $1.033B, down 36% compared to a year ago. Operating margin declined 330 basis points to 7.2%.

Boeing delivered 176 commercial planes during the quarter, down 4%Y/Y. The company booked 121 net orders which implies that the company's order backlog fell due to deliveries outstripping new orders.

Boeing 2016 Guidance

Boeing did not provide specific second quarter guidance but issued full-year 2016 guidance as follows:

  • Revenue in the range of $93B-$95B implying a 2.2% year-over-year decline at the midpoint.
  • Core EPS of $8.15-$8.35 implying a 6.9% Y/Y increase at the midpoint.
  • Reaffirmed its earlier guidance for full-year operating cash flow of $10B.

Near/Mid-Term Weakness Expected at Boeing

Boeing stock gained 3% after the earnings call as investors celebrated the stronger than expected top line. But there are some notable points that act as pointers to possible near/mid-term weaknesses that might develop in Boeing's business.

First off, the robust performance by Boeing's defense segment during the last quarter is something of an anomaly and one that the company is not likely to replicate in the coming quarters.

Second, shrinking margins in the commercial airplanes segment is quite likely due to volumes and/or price pressures which suggest the company is offering deeper discounts to win new orders.

Meanwhile, a shrinking backlog for the company's most profitable planes--737 and 777-- is definitely not a good thing. Although Boeing recently added 123 Boeing 737s to its order backlog, the company is ramping up production from the current 47 planes per month to 57 planes per month by 2019 which will reduce the time required to work through the backlog by about six months.

Boeing plans to reduce production rate of 777, which is incidentally even more profitable than 737, from the current 8.3 planes per month to 7 per month in 2017 as it awaits the launch of 777X. That can potentially hit the company's bottom line.

The long-term outlook for the company, however, remains quite good. The company plans to deliver about 900 planes in 2020, up from 740-745 deliveries expected this year. Investors should be aware that the lower expected deliveries this year compared to last year's deliveries of 762 is one of the reasons why Boeing stock has not performed well this year (down almost 7% YTD). More than 70% of those deliveries will be of the highly successful Boeing 737.

BA stock chart

Source: Boeing stock price chart by amigobulls.com

Investor Takeaway

Boeing's defense segment is not very likely to sustain, for long, the impressive growth it posted in Q1. This coupled with weakness in the company's commercial segment and lower expected deliveries during the current year are likely to keep Boeing stock range bound. The long-term outlook, however, remains quite good due to the significant ramp-up expected in production and deliveries as the years roll on.

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