Here at The Motley Fool, we know you've got a life. Between working while the sun shines and catching Z's when it doesn't, you may find it hard to keep up to speed on Wall Street events -- corporate "post-earnings conference calls," with stock analysts for instance.
These calls ostensibly benefit investors, but they usually take place in the early morning, or late afternoon, when ordinary investors are, you know -- working. Or commuting to and from work. Result: all too often, investors don't ever hear the news that management thinks they need to know.
That's where I come in. I listen to the conference calls so that you don't have to.
The KC-46A aerial refueling tanker. One of Boeing's biggest "successes" in the defense market. Source: Boeing.
Today, I'm recapping the news from Boeing's (BA 1.51%) July 23 earnings call with its stock analysts. Without further ado, here are a few of the things that management wants you to know about its business -- and the facts that investors need to know to put these things in context:
One of Boeing's biggest defense contracts is smaller than you think...
"With a long-term potential market for the KC-46 tanker of up to 400 airplanes worth $80 billion, it remains a franchise program for Boeing..."
As recently as last year, analysts were still thinking that the KC-46 tanker program could be worth up to $100 billion for Boeing over time. Now, Boeing CEO Jim McNerney appears to be throwing cold water on that thesis.
Setting a top revenue figure of $80 billion on the aircraft tells us several things about the future of this program. For example, when Boeing won the KC-46 contract away from rivals Northrop Grumman and Airbus three years ago, the contract it was awarded called for 179 tankers to be built and delivered for a total cost of $31.5 billion. That worked out to about $176 million per plane -- about a 9% discount to the list price on a less sophisticated civilian version of the Boeing 767 freighter on which the KC-46 is based.
An $80 billion top line on a full order of 400 planes, in contrast, suggests that Boeing is expecting to get a better price from the Air Force on its next batch of KC-46s -- perhaps a significantly better price. After all, now that Boeing has eliminated its rivals, there's no incentive to offer the Air Force a cut-rate deal on pricing anymore.
... but it's also more profitable
"... And we expect to realize strong returns over decades of production and in service support."
Still, getting $80 billion where $100 billion in revenues had been expected is still kind of bad news for owners of Boeing stock. So here's some good news: For a very long time, we've been told that Boeing expected that "the development phase [of KC-46, at least], would be a very low profitability or breakeven." Indeed, in July's conference call, CFO Greg Smith reiterated his belief that the development stage of this project will result in a "zero margin" for profits. But now Boeing is confirming that it still does expect to make profits on the program -- and not just profits, but "strong" profits -- eventually.
Recall that at the time of Boeing's winning the contract from the U.S. Air Force, chief rival Airbus's North America Chairman Ralph Crosby called Boeing's bid "very, very, very aggressive." The fact that, despite recently running over cost projections by $700 million, then following that up with a $272 million charge to earnings for "additional engineering and systems installation work" on the KC-46 -- Boeing's still confident it will earn a strong profit off the KC-46 is very good news indeed.
The commercial jets business isn't looking too shabby, either
"Combining growth and replacement needs over the next 20 years we forecast global demand for nearly 37,000 commercial airplanes a 4% increase over the last year's forecast."
Boeing also doubled down in its conference call on earlier-reported projections that the global air industry will need to buy about $5.2 trillion worth of new aircraft over the next 20 years. This forecast is up 4% over Boeing's best guess of one year ago -- and shows that in this company's opinion, at least, the air travel business is growing even stronger than previously hoped.
Incidentally, Boeing already has orders for "more than 5,200 airplanes" out of these 37,000 in its backlog. That's a good 14% of the market share already in the bag -- and a great head start for Boeing as it begins the next 20 years' worth of non-stop sales pitching.
The 787 Dreamliner is hitting its stride
"We continue our efforts to optimize the production system and maximize efficiencies at the 10 per month rate [for producing Boeing 787s]... reducing 787-8 unit cost by approximately 13% and improved final assembly flow times by more than 10% over the past year... We are also continuing to see good progress in the 787-9 productivity where we've seen 50% improvement in unit cost and a 25% improvement of flow time from the first aircraft to the seventh aircraft to rollout the factory."
Boeing CFO Greg Smith calls improvements in 787 production "solid" and says the firm hopes to deliver "approximately 110 787s in 2014" and generate more cash flow from this product line. Regardless, official "guidance for revenue, operating cash flow and delivery remains unchanged." (For the record, Boeing projects $87.5 billion-$90.5 billion in fiscal 2014 revenues, operating cash flow of about $6.25 billion, and roughly 720 planes delivered by year-end).
Investors can read this either of two ways -- both good. Either everything is going according to plan, with improved execution in 787 production resulting in more and more cash gushing into the company's coffers. Or even better, execution is ahead of schedule, and Boeing's intentionally not raising guidance in order to create the potential for a positive "earnings surprise" that will lift Boeing stock even higher.
Either way, pretty good news for shareholders.
Boeing could get a lot more profitable, a lot sooner than you think
"I think we'll start to see the CapEx moderate at I'll say kind of more normal levels at a stable production rate going forward."
Over the past 18 months, Boeing has been investing in capital expenditures at about a $2 billion-$2.1 billion-per year pace. That's been a drag on Boeing's ability to throw off free cash flow from its business -- albeit not a big drag, since at last report the company was still generating slightly more cash profit than its GAAP earnings number ($5 billion) would suggest.
And yet, S&P Capital IQ figures show that over the past decade, capex spending levels of $1.5 billion-$1.6 billion have been more common for Boeing.
The upshot: Boeing's been investing about 30% more in capex than "normal" as it spools up its 787 and 777 franchises, and upgrades its 737 line of products. A return to more normal levels "going forward," such as Smith is promising, could therefore add as much as $500 million to Boeing's annual free cash flow number -- making the company as much as 10% more profitable than it currently appears.
That tidbit shows why it sometimes "pays" to listen to the conference call. And lucky you -- you didn't even have to!
Boeing's 737 line of products -- one of the company's most reliable cash producers. Photo: Boeing.
