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Why the Boeing Company’s Q1 Earnings Could Be a Mixed Bag

Boeing (NYSE: BA  ) is slated to release its first quarter 2014 results on Wednesday. The American aircraft major finished 2013 on a solid note with a record backlog, and CEO Jim McNerney is quite optimistic about the current year as well. The company has a primary focus on "commercial airplanes market leadership" and "improving productivity" while offering an "unmatched portfolio of innovative aerospace." 

To gauge Boeing's performance, we suggest you look at four factors: revenue, earnings, cash generation, and backlog. Here's our take.

Higher deliveries could boost revenue
Boeing saw a 3% dip in revenue in the first quarter of 2013, but Bloomberg estimates that the Chicago-based aircraft major will record a 9% rise in revenue to $20.6 billion in the quarter, backed by solid aircraft deliveries. This trend's likely to continue, too. Boeing forecasts its full-year revenue to be in the range of $87.5 billion to $90.5 billion compared with $86.6 billion in 2013.

In the quarter, Boeing's delivered 161 jets in total, up 18% from the 137 jets delivered in the same period last year. This pleasantly surprised investors, who were otherwise worried about the ill effects of the defense segment. The company delivered 115 of its top-selling next-generation 737 jets and 24 units of the 777 model. Though there were technical snags concerning the 787 Dreamliner, the aero major delivered 18 of these planes against last year's one.

Higher deliveries could be Boeing's recurring theme in the coming quarters as the company is focused on boosting its production rate.

Emirates Boeing 777-300ER, Source: Wikimedia Commons

Earnings could take a beating
Both Boeing and archrival Airbus (NASDAQOTH: EADSY  ) have been victims of the struggling global economy and stressed airline operators. Boeing had earlier warned investors that profits could take a hit in the first quarter. It forecast its yearly earnings per share to be in the range of $7-$7.20, of which around 20% would be realized in the first quarter. However, the jet maker recently revised its first quarter expectations down by $0.38 a share. Wall Street estimates that the company will record a first quarter profit of $1.19 a share, down from last year's $1.61 a share.

The lower profit expectation is mainly due to lower airplane prices as the global economy remains weak. The company's also had to cut the production of its high-margin widebody planes, as cash-crunched airlines adjourned deliveries. Though this would only affect future deliveries, Boeing will have to reflect such price and production cut adjustments in the latest quarter as the company uses program accounting to record its sales and costs. (In program accounting, total costs to be incurred and total revenue to be earned are estimated and apportioned over the program period.)

Cash generation
Fluctuating cash flow has been a bit of a concern for the company. In the fourth quarter, Boeing converted only 88% of its operating income into cash as it built inventories for production of 787 and 737 at a higher rate. It recorded a free cash flow of $742 million, noticeably lower than $3,672 million recorded a year ago. 

Cash generation could remain suppressed in 2014 with McNerney citing "one-time factors" to have a bearing on it. Bloomberg estimates that cash conversion rate will be around 71% in 2014. Airbus has also been struggling with negative cash conversion in the past five to six quarters. Cash flows should be on our watchlist for the first as well as subsequent quarters.

The good news is that Boeing management expects cash flows to improve in the coming three years. This is because the company is ramping up its production rate and increasing efficiency to fasten the delivery of its giant backlog and convert it into free cash flow.

As a show of confidence, Boeing has recently announced the biggest share buyback program of $10 billion in its history and hiked dividend by 50% to $0.73 per share. McNerney said, "These actions reflect sustained, strong operational performance by our businesses, increasing cash flow, and our confidence in the future."

Order backlog
Boeing had ended 2013 with solid order backlog of 5,080 aircraft at a contract price of $423 billion. In the quarter, it added 234 net orders. This is more than Airbus' 103 net orders. As of late, however, there have been some concerns about cancellations and lack of new orders for more lucrative widebody aircraft for both Boeing and Airbus.

With the duo's big exposure to emerging economies, order cancellations are always a cause for caution. The companies don't supply details about the name and domicile of its clients, but Bloomberg data from January shows the collective exposure of Boeing and Airbus to different markets.

Source: Bloomberg Finance L.P.

Boeing's order book shows 45 cancellations till April 15 and just six orders for bigger planes -- one for 747, four for 777, and one for 787. The company did announce a big win from Japan's ANA Holdings for 20 widebody planes in March, but it's yet to be reflected in Boeing's website. So, any update on the ANA order or guidance about possible future deals will be worth watching.

Foolish last words
Boeing's stock has seen a fall of nearly 6% year to date as the company gave a conservative outlook for the current year. Revenue growth driven by higher deliveries and a stronger cash flow forecast suggest that Boeing has great potential, however. The first quarter numbers should give a clearer picture of how Boeing's faring in its initiative to meet its 2014 targets.

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  • Report this Comment On April 23, 2014, at 2:58 PM, Kelly15 wrote:

    Northrop’s sales were down 2.6% in third quarter of fiscal year 2013 over the year earlier period. All four segments of Northrop reported lower sales year over year, with Information Services reporting the highest decline of 8.8% for the quarter

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9/2/2015 2:58 PM
BA $129.80 Up +2.36 +1.85%
The Boeing Company CAPS Rating: ****
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Airbus CAPS Rating: No stars