Last Wednesday, Boeing (NYSE:BA) reported strong second-quarter earnings results and raised its 2017 outlook for earnings and cash flow. Bullish investors reacted by sending the stock up 14% for the week. Boeing stock is now up 55% year to date, making it by far the best performer among the 30 companies listed in the Dow Jones Industrial Average.
Following the second-quarter earnings release, Boeing's management provided more details on the aerospace giant's plans and expectations for the next several years. Management's bullish pronouncements during the earnings call likely contributed to the big share price gains at Boeing last week.
The cash flow outlook remains positive
We continue to expect operating cash flow to grow annually through the end of the decade, and we remain committed to returning approximately 100% of free cash flow to investors.
-- Boeing CFO Greg Smith
Boeing's updated cash flow guidance was the most impressive aspect of its earnings report. The company generated $7.0 billion of operating cash flow in the first half of 2017, compared to $4.5 billion a year earlier. It now expects to produce about $12.25 billion of operating cash flow this year, up from its original forecast of $10.75 billion.
Of that $1.5 billion increase, $700 million will come from tax savings related to accelerated pension funding. The other $800 million will come from strong operating performance. Most importantly, Boeing expects to continue growing operating cash flow each year through the end of the decade, despite starting from a higher base in 2017. Thus, investors can expect Boeing to produce very strong cash flow for years to come.
Strong market trends
In the commercial airplane market, airlines continue to report solid profits, and passenger traffic continues to outpace GDP, with traffic growth 8% through May. Also, cargo traffic is starting to experience a healthier recovery with 10% freight traffic growth over the first five months of the year.
-- Boeing CEO Dennis Muilenberg
A big reason for management's bullishness is that air travel continues to grow at a breakneck pace. In recent years, global passenger traffic has routinely grown faster than GDP, and the air cargo market seems to be improving after a recent downturn. These trends support production increases for commercial aircraft manufacturers like Boeing.
In fact, Boeing recently updated its long-term forecasts. It now estimates that airlines will need to buy more than 41,000 planes over the next 20 years. Order activity is picking up as well. In the first half of 2017, Boeing received 381 net firm aircraft orders, along with hundreds of commitments that could turn into firm orders later this year.
Still planning to boost Dreamliner production
... [W]e have assumed that we are going to 14 a month, and we've got a market to support that. But we've still got some work to do, so we'll continue to finish that work.
-- Greg Smith
For the past few years, Boeing has planned to raise production of its 787 Dreamliner aircraft family to 14 per month by 2018 or 2019 (up from 12/month today). However, Boeing averaged just 57 net orders per year for the 787 from 2014-2016. While there are still hundreds of unfilled Dreamliner orders, the dearth of new orders cast doubt on whether there was enough demand to justify another production increase.
Boeing needs to decide by year-end whether it wants to increase the 787 production rate to 14/month in 2019. (It's too late to raise production in 2018.) For now, Boeing is still in the evaluation phase. But on the bright side, it has already secured 76 net firm orders this year.
Investment spending will be stable
I said part of our plan for the company is to have a non-cyclical business and a well-tailored R&D and CapEx profile. ... We have other investments that we're contemplating for the future, but all of those are feathered in to provide us a very nice, stable CapEx and R&D profile for the rest of the decade.
-- Dennis Muilenberg
Not too long ago, Boeing struggled to produce free cash flow due to lower production and heavy spending related to Dreamliner development. Making sure this never happens again has been an important goal for the company recently.
Better management of Boeing's development programs will certainly be critical for keeping free cash flow buoyant. However, it's also important to avoid volatility in the timing of investments. Boeing thinks it has that problem solved. With 777X development winding down by 2020, the company has built-in capacity to ramp up spending on other projects in the coming years.
The "middle of the market" studies continue
... [W]e see route structures around the world continuing to evolve as general passenger traffic growth is occurring, in particular, new regional structures, point-to-point connectivity. That's in this 4,000 to 5,000 nautical mile range, airplanes that are in the 220 to 270 passenger range. That's the ballpark that we're looking at and discussing with customers.
-- Dennis Muilenberg
The most significant future investment that Boeing is contemplating is development of an all-new jet that would fill the gap in size and range between the 737 and 787 families. It would be able to fly more than 4,000 miles -- beyond the range of narrowbody jets -- with a lower trip cost than today's widebody planes.
Boeing has held talks with more than 50 customers about their interest in a "middle of the market" plane like this. It sees potential demand for 2,000-4,000 airplanes. That said, developing a brand-new plane is extremely expensive. Boeing still needs to do more work to prove the business case before launching development of this proposed product line.