Boeing Q3 Earnings: Earnings Beat As Future Seems Clearer

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The Boeing Company

Boeing (NYSE:BA) reported quite a solid earnings, mostly on the back of favorable tax adjustments. Revenues were down 8% year on year, as expected, on the timing of deliveries. That said, the company generated significant cash flows, a key metric that is immune to one-time accounting adjustments. It is expected that Boeing’s cash flows will continue to remain strong in the next few years driven by increased production of its 737 jets and plans to improve profitability of the 787 Dreamliner. Furthermore, the company increased its outlook on the total number of deliveries in the year, up from the 740 to 745 range to 745 to 750 range. However, the company warned that it may reduce the production of the 777 aircraft to just 42 a year (from the current 100 jets a year) due to weaker-than-expected demand for the aircraft. Orders are expected to remain soft well into 2017 as well.

As mentioned previously, revenues fell 7.5% year-over-year in the quarter on a 5.5% decline in deliveries on the commercial side of the business. On a net basis, however, Boeing’s aircraft production is actually on the rise. But a lot of the planes being built are the new 737 MAX, which won’t be ready for delivery until mid-2017.

Business Environment Seems Positive Going Forward:

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In general, it seems as though overall demand for commercial planes, defense and space platforms, and services and support remains positive. At present, the new order activity in the commercial space is slow but healthy. Narrow body aircraft such as the 737 MAX are seeing great demand at the moment as air carriers look to replace older planes in its fleet. The wide-body market seems to be in a slump at the moment. That said, demand for the wide-body aircraft over the next 20 years could see a rise by about 9,000 aircraft on the back of heavy replacement activity amongst air carriers. Over the long-term, the company expects a demand for over 39,600 aircraft valued at $6 trillion, with over $1 trillion of this opportunity coming in from China.

Despite the softening wide-body market, Boeing is in a great position to accommodate the market as demand returns to more normal levels. Currently, the total orders for wide body planes stand at 52. Additionally, the U.S. Treasury recently granted the company a license to sell 80 new planes to Iran Air including a mix of 34 wide body planes. However, the timing and outcome of the ongoing wide body sales campaign will have a direct impact on the 777 production decisions. As for the 787 program, demand is strong and production is expected to ramp up to 14 planes a month at the end of the decade.

That said, even if the moderation of the wide body aircraft becomes a reality in the future, it is expected that commercial aircraft deliveries will grow beyond 900 airplanes a year through the end of the decade, supporting the company’s expectation that it will grow cashflows year-over-year throughout the time period.

Current Plan For The 777 Program:

At present, the backlog for the current generation 777 stands at more than a 160 planes. In 2016, thus far, the company has received 17 net new 777 orders. Previously, the company had announced that it will reduce production to just 7 a month starting 2017. At this rate, delivery slots for the 777 are now about 85% sold out for 2017. As for 2018, when the company starts phasing in production of the 777X aircraft, delivery slots are about 60% sold out at a planned delivery rate of approximately 5.5 per month.

Boeing management is quite confident that, given the recent order additions and ongoing campaigns to fill in the remaining delivery slots, the company will not have to reduce production more than one or two units per month below the current plan. However, if such a situation were to arise, implementation would occur in late 2017 or early 2018. On the flip side, if the ongoing campaign leads to additional orders, the existing plans will not need amending.

As for the next-generation 777X, the company has a strong foundation of 306 orders that supports the ramping up of deliveries in 2020 and beyond.

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