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3 Things to Watch When Boeing Reports Tomorrow

By Rich Smith - Apr 26, 2016 at 9:03AM

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Hint: It's Dreamliners, more Dreamliners, and... deliveries.


Boeing's 787-10 Dreamliner features a 6,340-nautical-mile range... and more important, a $306 million price tag. Image source: Boeing.

It's earnings season on Wall Street, and this week the focus turns to aerospace and defense. Over the next few days, at least a half-dozen of America's biggest aerospace and defense companies will report their Q1 2016 numbers, and the biggest company in the industry will also be one of the first: Boeing Company (BA 1.29%) reports Wednesday.

Here's what we know today, before the news comes out.

What analysts say

  • Buy, sell, or waffle?: According to data from S&P Global Market Intelligence, 24 analysts keep Boeing stock on their radar. Ten of them love it, only two hate it, and a dozen more are unsure.
  • Revenue: On average, analysts predict a tiny 3% dip in quarterly sales to $21.4 billion.
  • Earnings: Profits could encounter more turbulence, falling 8% to $1.82 per share.

What management says
Those are pretty small numbers for Q1. But when last we heard from Boeing, management was still looking forward to a strong fiscal 2016. Boeing's most recent guidance is for the company to earn approximately $8.55 per diluted share this year on roughly $94 billion in revenue. Assuming those numbers hold true when December rolls around, that will make for a 2% drop in sales for the year -- but 15% growth in profits.

Operating cash flow this year is projected to grow 6% to "approximately $10 billion." Minus projected capital spending of $2.8 billion, that would leave Boeing with $7.2 billion in free cash flow by year-end -- up 4% from 2015.

What management does
As you can see, there's already a pretty large disconnect between Boeing's projections for GAAP "accounting profits" growth versus growth in actual cash profits -- free cash flow. And here's another thing to worry about: Boeing's margins are slipping.

Margins

Sept. 2014

Dec. 2014

April 2015

July 2015

Oct. 2015

Dec. 2015

Gross

15.6%

15.4%

16.5%

13%

16.4%

12.4%

Operating

8.5%

8%

8.8%

6.7%

9.7%

4.6%

Net

5.7%

6%

6%

4.5%

6.6%

4.4%

Data source: S&P Global Market Intelligence.

What to watch tomorrow
Again, as you can see, there's a clear trend of slippage in each of gross, operating, and net profit margins at Boeing. And here's where things get worse:

Last week, an analyst at Bank of America Merrill Lynch sounded a warning note about Boeing's 787 Dreamliner jet program, which poses an especially big risk to profit margins at the company. As Bloomberg explains, it cost Boeing "almost $29 billion" to develop its Dreamliner. Boeing had previously hoped to earn enough back on 787s sold to cover the cost of development by December 2022. But according to Merrill's calculations, Boeing's goal is "unachievable." Cash flow from delivering 907 Dreamliners through the end of 2022 will amount to no more than $14 billion -- leaving Boeing billions short, and potentially prompting a charge to earnings.

Thus, the first thing we'll be on the lookout for tomorrow is -- a charge to earnings. Natch.

Conversely, one sign that a charge will not be forthcoming, as pointed out by Bloomberg, is any indication of rising customer interest in Boeing's larger 787 variants -- 787-9s and 787-10s. Boeing has said these planes are proving popular and, because they sell for higher prices and bring better profits, a greater proportion of -9 and -10 sales could help Boeing recoup its development costs faster. (For context, Boeing list-prices the 787-10 at $306.1 million -- $81.5 million more than the 787-8.)

Final point: deliveries. Last we heard, Boeing was slowing the pace of aircraft production this year, predicting it would deliver somewhere between 740 and 745 commercial aircraft of all stripes in 2016. That would be fewer than the 762 aircraft delivered in 2015, and allay concerns that Boeing's backlog is shrinking. Any change in the company's expected deliveries will help us gauge the chances of where backlog will be heading in the future.

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