Do I even need to say it? Is this even news anymore? Boeing's (NYSE: BA) delaying release of another airplane. It's taking another charge.
Ho. Hum.
Newswires are all atwitter over yesterday's "news" that Boeing's once-delayed-already 747-8 freighter program is over budget and overdue. Late changes in plane design bear the blame for most of the $1 billion in charges Boeing will take on the project. "Challenging market conditions," which convinced Boeing to build the planes at lower volume than it had hoped, for longer than it wished, bear the rest. But broadly speaking, this is just more of the same from Boeing -- bad planning, bad execution, and bad timing, which have combined to crash profits.
What color is Boeing's parachute?
Pundits were quick to wonder aloud whether the 747-8 -- unprofitable by Boeing's own admission -- is due for a cancellation. Were it to do so, this would be bad news for 747-8 suppliers such as General Electric (NYSE: GE), Spirit AeroSystems (NYSE: SPR), and Honeywell (NYSE: HON).
But I think that's unlikely. With 105 747-8 orders in backlog as of the end of August, the 747-8 is worth some $31.5 billion in future revenue to Boeing. That's a pot of gold nearly as big as the one Boeing's tussling over with Northrop Grumman (NYSE: NOC). I doubt Boeing will upset the pot over a trivial detail like "whether it's cooking up profits."
Speaking of profits ...
But that shouldn't be true for investors. Speaking as one, I am very interested in seeing my company earn a profit. And Fools, what I see at Boeing worries me.
The $1 billion charge Boeing takes in the third quarter will be big enough to essentially negate the Commercial Aircraft (BCA) division's $1.2 billion in operating profit from the last calendar year. Viewed another way, that $1 billion charge on $31.5 billion worth of planes on order will reduce their operating profit margin by about 3.2%.
Which brings me to the real point. Over the last five years, BCA averaged an operating margin of about 7.3%. Even if the 747-8 was on track for similar performance (a big if, already), then Tuesday's charge comes close to cutting that profit margin in half. Granted, smoothed out across more orders in the long term, this charge-off might not look so bad, but we'll cross the "more orders" bridge when we get there.
Foolish takeaway
Next time someone tells you that "Boeing's a buy" because, "hey, the forward P/E is only 12" -- take that number with a grain of salt. Just like Boeing's Q3 earnings, it's subject to change.
Do you think Boeing's a buy? Tell us why (in the comments section below.)
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