Return to your seats and put up your meal trays, investors. It's just about time for Boeing (NYSE:BA) to report its third-quarter 2006 earnings. The news will be touching down on Wall Street this Wednesday.

What analysts say:

  • Buy, sell, or waffle? Two dozen analysts keep Boeing on their radar. Of these, 14 rate the stock a buy, seven say hold, and three more say sell.
  • Revenues. On average, the analysts expect to see Q3 2006 sales rise 19% in comparison with last year's Q1. The target is $15.1 billion.
  • Earnings. But profits are expected to fall by half to $0.63 per share.

What management says:
Boeing's big news of the quarter was actually not Boeing's news at all. Rather, it was the continuing mess over at archrival Airbus. (If you spent the summer on a desert island and missed the story, you can get up to speed by clicking here, here, and here.) Basically, Europe's "Continental Champion" airplane-builder has bungled the job of building its gargantuan A380 mongo-jet -- it's potentially losing orders already placed, virtually guaranteeing that the project will be a money-loser, and making Boeing look really, really good in comparison.

In more Boeing-centric news, in September, the firm concluded its $2.1 billion deal to acquire airplane parts supplier Aviall. And finally, in August, it wrapped up its ill-considered venture into the world of Internet broadband service, winding down Connexion by Boeing and announcing it will take about a $290 million charge to earnings in Q3 (that is, Wednesday), and another $30 million charge in Q4.

What management does:
Boeing has grown its gross margins 150 basis points, or nearly 10% over the past 18 months. In contrast, operating profitability is down 8%, and net profitability has hardly improved at all.

Margins %

3/05

6/05

9/05

12/05

3/06

6/06

Gross

14.4

14.8

14.8

15.7

16.3

15.9

Op.

3.8

4.7

4.2

4.0

4.4

3.5

Net

3.4

3.2

4.3

4.7

4.8

3.5

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
How can that be? How can a company with a sizeable defense contracting business in a time of war, and a huge commercial business at a time when its main rival is flailing, be making less money on its sales?

Two reasons: First, look carefully and you'll see that as recently as six months ago, Boeing had improved its net margin significantly in comparison with the trailing numbers from Q1 2005. What caused the net to plunge last quarter was that the firm took a couple of very large charges in Q2, related to problems with an international airborne surveillance program and a legal settlement with the Justice Department, respectively. Neither of these developments can exactly be called positive, but neither do they look likely to repeat.

In contrast, the reason operating margin fell was both positive and recurring. Boeing's operating margins are usually affected by three factors: selling, general, and administrative costs (SG&A); stock options expensing; and research and development spending (R&D). Year-over-year growth in operating costs has outpaced sales growth in the past six months (10% vs. 7%). That's bad, but its effect was outweighed by a 9% decline in options expenses during the same period -- with the result that the combined expenses of these two categories grew less quickly than sales (6% vs. 7%). What really "hurt" Boeing's operating margin was the growth in R&D -- up 37% year over year, or five times faster than sales growth.

Others might bemoan the declining operating profitability, but from this Fool's point of view, it's a sign of hope. While archrival Airbus is flailing and failing, trying to get its current generation of airplanes on line, Boeing has opened up the spigots on R&D spending to widen the technological gap in the next generation. That's a strategy that will pay off in the long run.

Competitors:

  • Raytheon (NYSE:RTN)
  • Northrop Grumman (NYSE:NOC)
  • Lockheed Martin (NYSE:LMT)
  • Embraer (NYSE:ERJ)
  • General Dynamics (NYSE:GD)
  • SpaceHab (NASDAQ:SPAB)

For further Boeing-related news and views, read:

Embraer is aMotley Fool Stock Advisorrecommendation. For more of Tom and David Gardner's market-beating picks, try out Stock Advisor free for 30 days.

Fool contributorRich Smithdoes not own shares of any company named above.