Boeing Stock Post-Earnings Selloff Presents Fresh Entry Points

  • Boeing has managed to beat top and bottom line expectations during its Q4 2015 earnings call.
  • The company however, has issued soft 2016 guidance leading to a hammering or Boeing stock.
  • The general outlook for the company remains good and long-term investors should use the selloff to buy Boeing stock.

Leading aircraft manufacturer Boeing (NYSE:BA) has reported its fourth quarter fiscal 2015 earnings. Boeing managed to beat both top and bottom line estimates after reporting revenue of $23.6B, down 3.6% Y/Y but $50M better than consensus estimates, while EPS of $1.60 was 31% lower than the Q4 2014 reading, but $0.34 above estimates. Full-year revenue was up 6% Y/Y to $96.11B. The decline in earnings was due to an impairment charge of $569M ($0.84/share) that the company took in relation to lower anticipated production for Boeing 747-8 jets. Boeing plans to cut production of the cargo jets from the current rate of 1 per month to 0.5 per month due to sluggish demand in global air cargo space. The company had earlier lowered the production rate for the jet from 1.3 per month. Without the impairment charge, Boeing’s EPS would have grown by 5.6% Y/Y.

Another notable negative from the report was that Boeing delivered 182 commercial planes during the quarter, 17 less than it managed to during the previous year’s comparable quarter. Full year deliveries for Boeing, however, increased from 732 a year earlier to 762 in 2015. Boeing’s commercial airplane segment (two-thirds of overall revenue) reported revenue of $16,089M during the fourth quarter, 4% lower than the Q4 2014 reading while its operating profit of $566M was down 64% Y/Y due to the said impairment charge. Full year numbers for the segment were better since revenue climbed to $66,048M, 10% Y/Y higher, while operating profit fell 20% to $6,411M.

On a brighter note, Boeing’s defense segment (one-third of overall revenue) finally showed signs of stability after years of double-digit declines. The segment’s revenue was up 3% during the fourth quarter to $7,785M while operating profits were up 5% to $963M. For the full year, Boeing reported defense revenue of $30,388M, down just 2% Y/Y, with an operating profit of $3,274M, up 5%.

For investors who are wondering why Boeing even bothers with manufacturing a military aircraft, one big reason is that margins here are fatter than those for the commercial segment. Boeing’s defense segment finished the year with an operating margin of 10.8%, a good 300 basis points higher than the same metric for the commercial segment.

Boeing Issues Weak 2016 Guidance, Shares Hammered

What really undid Boeing stock was the company’s soft guidance for 2016. Boeing said that it expects to deliver 740-745 airplanes during 2016, or about 2.5% lower than 2015 deliveries. Boeing attributed the lower deliveries to the 747 production cut, as well as the lower production of 737 planes as the company shifts to production of 737 MAX. Boeing said that it expects 2016 core earnings (excluding pension and other costs) to clock in the range of $8.15-$8.35, ~10% lower than 2015 core earnings and well below analyst consensus of $9.43.

The lower-than-expected guidance led to a severe hammering of Boeing shares which tanked 10% immediately after the earnings call.

Boeing 5-Day Share Returns

Boeing-1

Source: CNN Money

Despite the soft 2016 guidance, there are a couple of reasons why long-term investors should consider Boeing shares for their portfolio. The first is that Boeing routinely issues weak guidance which it tends to beat by a wide margin. Boeing has exceeded quarterly earnings estimates for the last seven consecutive quarters now. Although fourth quarter top line growth slowed down quite a bit, macroeconomic factors are still in Boeing’s favor and growth could recover later in 2016.

The second is that Boeing’s operating cash flow trends suggest that profitability for the company’s Dreamliner 787 project is moving in the right direction. Although Boeing’s operating cash flow of $9.4B for 2015 came in slightly lower than its projection of $9.5B, investors should note that the company achieved that figure even after it recorded a $2B drop in customer advances. This suggests that Dreamliner is gradually becoming less of a drain on cash flow and profitability. Boeing said that it expects operating cash flow of ~$10B in 2016 which points to further cash flow improvement, given the company projects declines in revenue and earnings during the year.

Perhaps Boeing’s operating cash flow guidance reinforces sentiments by Boeing analyst Uresh Seth who earlier said the company would deliver a record 140 Dreamliner jets in 2016, with a favorable mix of three times as many 787-9 jets than 787-8 jets. Bigger models typically sport much higher selling prices than smaller models, with just a minimal increase in production costs, leading to much better margins.

Boeing Earnings Investor Takeaway

Even though Boeing has issued soft guidance for 2016, there is a good possibility that the company will handily exceed its projections. Additionally, the company’s projection for a further improvement in operating cash flow is encouraging because it suggests that Boeing’s Dreamliner project is edging closer and closer to profitability. Boeing shares could rebound later in the year and long-term investors should use the post-earnings sell-off to gain fresh entry points.

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