Earnings per share soared 39% year over year at Boeing (BA 0.75%) last quarter. Before investors break out the champagne, though, it's important to recognize that all of this supposed earnings growth came from a pair of favorable tax adjustments.
Boeing reported solid Q3 earnings on Wednesday. Image source: Boeing.
Nevertheless, Boeing also reported strong growth in free cash flow, a key metric that is relatively immune to one-time accounting adjustments. Boeing's free cash flow should continue to rise in the next few years as it raises production of its workhorse 737 jet and works to improve the profitability of the 787 Dreamliner program.
Q3 by the numbers
At the beginning of 2016, Boeing's management forecast that revenue would decline this year, due to a reduction in commercial airplane deliveries. After a year-over-year revenue increase during the first half of 2016, this scenario began to play out in Q3.
| Metric |
Q3 2016 |
Q3 2015 |
Growth (YOY) |
|---|---|---|---|
|
Revenue |
$23.9 billion |
$25.8 billion |
(7.5%) |
|
Commercial airplane deliveries |
188 |
199 |
(5.5%) |
|
Core operating margin |
9.2% |
10.2% |
N/A |
|
Free cash flow |
$2.6 billion |
$2.3 billion |
13.4% |
|
Core EPS (adjusted) |
$3.51 |
$2.52 |
39.3% |
|
Total order backlog |
$462 billion |
$485 billion |
(4.7%) |
Data source: Boeing Q3 2016 earnings release. YOY = year over year.
Revenue fell 7.5% year over year last quarter on a 5.5% decline in deliveries for the commercial airplanes segment. On a net basis, Boeing's aircraft production is actually rising, but some of the planes being built are the new 737 MAX, which won't be ready for its first delivery until sometime in 2017. Additionally, output of the current-generation 777 is starting to slow, as some buyers wait for the next-generation 777X to arrive around 2020.
Excluding $0.98 of tax benefits, EPS was roughly flat on a year-over-year basis. Boeing's ongoing share repurchases reduced its share count by 8% relative to Q3 2015, helping to offset a decline in its pre-tax earnings.
Free cash flow continues to improve
Free cash flow is the most important metric for Boeing investors to focus on right now, as program accounting can lead to a sharp disconnect between accounting profit and cash earnings. Through the first half of 2016, free cash flow surged 44% year over year. In Q3, the increase was a more modest 13.4%.
Nevertheless, this continued double-digit growth in free cash flow is great news for investors. Boeing bears have repeatedly warned over the past year that 777 production cuts will lead to falling free cash flow going forward. In Q3, Boeing delivered only 22 777s, down from 27 a year earlier. The company's quarterly results thus provide a preview of what cash flow will look like as 777 production declines. So far, it looks like there's no reason to worry.
Looking ahead
Boeing raised its commercial airplanes delivery guidance for 2016 by five units on Wednesday. It now expects to deliver 745 to 750 airplanes this year. As a result, it also increased its full-year revenue guidance by $500 million to a range of $93.5 billion to $95.5 billion.
Adjusting for the tax items recorded last quarter, Boeing's EPS guidance remained roughly the same. That's a fairly good result, considering that Boeing recorded a $162 million pre-tax charge during Q3 related to delays in its program to build a new spacecraft to take astronauts to the International Space Station.
Boeing hasn't provided formal guidance for 2017 yet, but CEO Dennis Muilenburg stated last month that revenue would be roughly flat, while profit and cash flow would both increase. Boeing's ability to manage through last quarter's decline in 777 deliveries bodes well for its ability to meet that informal forecast.
