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How Did Boeing Fly So Far Above Profit Expectations for Q2?

By Motley Fool Staff - Updated Jul 31, 2017 at 7:16PM

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The aerospace giant raised guidance too, and its gains on the day kept the whole Dow airborne.

In this this Market Foolery segment, host Chris Hill and Motley Fool Funds' Bill Barker discuss how well the nation's biggest commercial aircraft company is doing, its major stock gains on Wednesday, its competition, and its massive moat. The also explain how a company whose sales are made so publicly can still surprise the Street.

A full transcript follows the video.

This video was recorded on July 26, 2017.

Chris Hill: Just because they're beating earnings expectations doesn't mean the stocks are all going up. We'll start with one that is, and that's Boeing. Second-quarter profits blew way past expectations. They also raised guidance. Boeing, which is one of 30 stocks in the Dow Jones Industrial Average, is essentially singlehandedly keeping the Dow in positive territory, because shares of Boeing are up 8%. I don't remember the last time Boeing had that kind of a move.

Bill Barker: No. It's unusual. One of the reason it translates to such a big move in the Dow is because the Dow is, bizarrely, a price-weighted index, so the bigger-priced stocks move the index more. So those who haven't split their shares for a long time, which would be the case with Boeing, which is now trading for upwards of $200 a share and even more than that today, that's a bigger move, just because of a quirk in the accounting of the Dow. But 8% for a company that's nearing $100 billion in market cap is a pretty significant move no matter how you measure it.

Hill: When you look at Boeing, they're in the business of making planes. Yes, they have competition, but it's such a capital-intensive business that I think at least one of the bull cases for investing in a company like Boeing is, the barrier to entry when you're making airplanes for a living is massive.

Barker: Right. It's more or less, Airbus is the competition for what Boeing is doing on the commercial side. And Boeing is getting the better of that competition at the moment. They've got a bigger backlog, they're getting more of the orders for their wide-body planes, and Airbus is not firing on all cylinders at the moment. So this comes and goes. At the moment, advantage Boeing. They have a backlog of almost 6,000 commercial aircraft. That provides greater visibility for future earnings than lots of other companies. Additionally, defense looks like it's going to be picking up for them.

Hill: In terms of the backlog that you mentioned, is that something that, even with the price move today, you can look at how many planes they have on order and say the foreseeable future looks really good for them?

Barker: Despite the fact that they beat on the net income line by a lot, the sales came in right about where they were expected, $22.7 billion for the quarter. The visibility is provided by the backlog and company guidance, and they've now guided higher for the rest of the year on the earnings side. Where they surprised was how much money they made out of these sales. Margins improved, and they improved their tax rate, and that was part of it, in terms of the bottom line. Still, they get to hold on to that money if they're not paying it in taxes.

Hill: Wouldn't that be nice?

Barker: Well, for the quarter. That was the story in some of the other earnings reports today as well -- more of a margin beat and more of a bottom line, in some cases, tax-driven beat based on some of the financial engineering. And I don't say that as a negative thing. There are times when you don't pay taxes. As a function of where a lot of companies are right now, they and individuals are delaying paying taxes now, if possible, because there's a possibility that taxes are going to be lower in the future. So you might choose to make certain taxable events occur later, and that's something that not only Boeing but other companies are doing at the moment.

Bill Barker has no position in any stocks mentioned. Chris Hill has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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