Should The Boeing Company Investors Worry About This Troublesome Figure?

While the vast majority of Boeing's financial results are on the surge, one important number isn't. Here's what investors need to watch regarding Boeing's operating margin.

Feb 13, 2014 at 2:00PM

Boeing's (NYSE:BA) share price soared 77% in 2013 and this stock performance wasn't a fluke. Boeing's cash and marketable securities have ballooned over the last three years while its total consolidated debt has steadily declined. Its revenues, earnings per share, and free cash flow continue to post strong results. But one figure lagging behind the rest has been the company's operating margin. There's one specific factor that investors often overlook with Boeing's operating margin. Here's the story, from the top down.

Graph by author; Source: Boeing's quarterly financial statements

What gives?
When scratching the surface of Boeing's results you won't find any answers to questions about why its operating margins have been in a slight decline. Take Boeing's biggest money maker, its commercial airplanes segment, for example. Deliveries increased 8% last year to 648, up from 601 in 2012. With revenue increasing 8%, and Boeing focusing on improving production and minimizing costs, earnings from operations increased by 23%. Those factors enabled its operating margin for the commercial airplane segment to increase by 130 basis points last year to 10.9%.

With an improving operating margin in its largest business segment, the logical leap for investors is to assume the problem lies within its other business: defense, space, and security. It's an especially easy assumption as revenues from military aircraft have been in decline due to massive budget cuts by the government which could total $1 trillion over the next nine years. But after looking at the numbers, the blame for declining operating margins doesn't land on defense, space, and security, either.

Source: Boeing's Q4 and full-year 2013 results

As you can see, for the full year the segment improved its operating margin by 30 basis points. So, if Boeing's two business segments both improved their respective operating margin, how is it that the overall operating margin of the company continues to decline? The answer is an obligation shared by many large corporations today: pension costs.

Source: Boeing's annual financial statements

Like other large industrial companies, such as Ford and General Motors, Boeing has been forced to contribute more to its pension plan as its obligations have risen due to record low interest and discount rates. As the amount of its contributions rose and its operating margins declined, the company separated some pension costs to report non-GAAP "core" operating earnings, which helps show a slightly clearer picture of its operating health.

The root cause of the decline in operating margin remains, so investors should expect the trend to continue. This is especially true because Boeing recently increased its production rate of the 787 Dreamliner, which is, at least initially, much less profitable than planned. With the Dreamliner's lower margins becoming a larger part of the segment's earnings, it will be even more important for Boeing to shore up its pension costs to improve overall operating margins.

With all that said, what can the company do to fix its pension costs and reverse its overall operating margin decline?

Looking ahead
The key for Boeing to turn around its decline in operating margins appeared late last year. Boeing's battle at its Everett, Wash., plant will likely be an occurring theme over the next decade. Boeing used the massive leverage of job security to convince the union workers to give up their defined benefit pension plan in favor of a standard 401k-style contribution plan -- a trend that is sweeping throughout the nation's largest businesses. In turn, the workers were guaranteed production of Boeing's highly demanded 777X -- a valuable guarantee, no doubt.

Boeing took a big risk: the union workers could have voted no and went on strike, but in the end the workers agreed to the new-style plan, which could be the beginning of the end for Boeing's sky-high-pension costs. Until then, investors shouldn't be worried, but it would be wise to keep an eye on the pension contributions, costs, and discount rates that contribute to the company's total obligations to better understand where its operating margins, and thus profits, are headed over the next few years. 

Dividend stocks like Boeing can make you rich. Need 9 more elite dividend ideas?
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Daniel Miller has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information