Boeing Q4 Earnings: 2016 May Not Be As Record Breaking As 2015, But Future Still Bright

Boeing (NYSE:BA) announced its fourth quarter earnings on Wednesday, January 27th. Revenue and earnings for the quarter beat analyst estimates but fell a bit short of the prior year. This was primarily because Boeing incurred a charge of $569 million in the quarter for halving the production of its 747-8 variant as cargo demand continues to weaken. On the upside, however, 2015 overall was a great year for the company. Boeing Commercial Airplanes posted a strong $66 billion in revenues (a 10% increase over the previous year) while delivering an industry record of 762 airplanes. In terms of order activity, the Chicago based aerospace giant managed to bag 768 net orders to add to the sizeable backlog of about 5,800 airplanes (about 7 years of production at current rates). ^[1]

While earnings results were ahead of consensus, management’s guidance for 2016 was far short of expectations. Commercial deliveries for the year are expected to be 740 to 745, as productions rates are lowered to match expected demand. The company guided earnings oer share to be within the range of $8.15 to $8.35, well below the consensus. This is primarily due to reduced production of the 747-8 airplanes, the transition to the 737-MAXs, and lower deliveries of mailitary aircraft (especially the F/A-18 and C-17). Following this news, Boeing shares tumbled by almost 10%. However, after this initial shock, it seems likely that the stock will rebound and grow in the long term owing to the company’s strategic planning.

Financial Highlights for FY 2015:

• Revenues for the year were posted at a record $96 billion. This reflects an increase of close to 6% in contrast to the year prior.
• The core EPS for the year came in at close to $7.72 offset partially by the $1.61 KC-42 tanker charge incurred in Q2 and the 747-8 charge incurred in the current quarter.
• Operating cash flow for the year was a solid $9.4 billion.

Additionally, the Board of Directors has approved a $14 billion share repurchase program (to be completed over 2 to 3 years) while increasing the dividend by a further 20%. That’s up a whopping 125% in three years. Over the same period, the company also managed to reduce the share count by about 10%. In 2015 alone, the company repurchased 47 million shares for $6.75 billion and paid out almost $2.5 billion in dividends.

See our complete analysis of Boeing here

Disappointing 2016 Outlook, But All Is Not Lost:

Despite posting a solid quarter and an even better year, Boeing is wary of its performance going into the new financial year. The company is expecting to rake in revenues in the $93 to $95 billion range. As mentioned previously, this gloomy outlook is primarily due to reduced volumes and production of certain aircraft. The aerospace giant hopes to deliver anywhere between 740 to 745 airplanes next year. The first reason for the low revenues is the halving of the 747-8 aircraft production to just 6 airplanes as demand for cargo aircraft stalled in 2015. However, management is confident that the demand in the cargo market will see a reversal soon. They estimate that by 2019, close to 240 freighters will be more than 20 years old and will need replacing. This provides the company with some respite.

The second reason to affect revenues in 2016 is the planned transition to the 737-MAX. Production has slowed as the company continues to focus on its newest project. The good news is that within the year, the company actually managed to roll out its first aircraft. Boeing hopes to carry out the various test flights this year, and subject to certification, start production by 2017. The final reason for such a disappointing outlook is the reduced volumes on the F/A-18 and C-17 programs. The company managed to sell of the bulk of the final aircraft last year. Now it is focusing to try to build up the inventory so deliveries in 2017 go undisrupted.

All in all, it seems that despite an immediate fall in sales in the coming financial year, things for Boeing are looking up in the future. This claim can be further justified by the following factors:

1. The Export Import Bank was recently given a five year extension. The extension of the deal allows American exporters to compete on a level playing field in the global markets by restoring a competitive balance to international trade. This enables Boeing to further de-risk their business going forward.
2. Additionally, due to the low oil prices, airline tickets have been awfully cheap in the past few quarters that is leading to the creation of immense demand. Last year alone, passenger traffic grew at a significant 7%. The IATA expects 2016 to be another record year for airline companies, fuelled primarily by low oil prices, increased passenger demand and airline efficiencies. It is estimated that passenger demand is set to increase at close to 7% next year while cargo increases at a rate of 3%. This uptrend is likely to boost airline orders with Boeing and other manufacturers. The company targets to sell close to 38,000 aircraft in the next 20 years (that’s an average of 1900 planes a year).
3. As previously mentioned, this year saw healthy order activity (768 net orders). This adds to the company’s robust 5,800 backlog, which is about 7 years worth of production at current levels. This backlog is driven mostly by 737-8 orders which account for almost 4,400 of the total. Apart from this, the company is also seeing heavy demand for its 777X and 787 variants. The Chicago based company is set to increase production rates of all the aforementioned aircraft variants as soon as 2017.

Based on these factors, we believe the company has a promising outlook, despite a weak-than-expected 2016 guidance.  The company in 2016 will see reduced revenues and margins for a few quarters, but the secular outlook is strong.

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1. Boeing Q4 2015 Earnings Call Transcript, www.seekingalpha.com [↩]