Boeing will remain a cash-generating superjumbo even if weak demand forces deeper production cuts to the 777 jetliner, a crucial source of profit, says the chief executive Dennis Muilenburg.
Cash flow will increase next year and in 2018 as the Chicago plane maker fills a record backlog of orders and reaps its first profits from the 787 Dreamliner, Mr Muilenburg said. The company’s coming cash bounty has been a selling point with investors, potentially bolstering shares in a tough market for jet orders.
Investors’ uncertainty over Boeing’s business case sent shares on a wild ride on Wednesday. The stock fell after the market opened and then reversed course to become the biggest gainer on the Dow Jones Industrial Average after Mr Muilenburg said cash generation would grow under every scenario contemplated for the 777, the company’s second-largest profit driver. (Watch 777 production video below)
“The fact that stock has been basically flat for almost three years tells you it is absolutely a ‘show-me’ story,” said Charlie Smith, the chief investment officer with Fort Pitt Capital Group. There is upside for investors if Boeing can run its factories efficiently enough to “reach the cash flows that allow this stock to break from trading with orders”.
The shares climbed 5 per cent to US$145.97 at 3:31pm in New York today, the biggest intraday gain since January 2015.
Investors have been nervous that the global aerospace market is cooling and wary of Boeing after recent earnings disappointments. The manufacturer in July reported its first quarterly loss in seven years and its first-quarter results missed analysts’ estimates for the first time in five years. Also of concern are Boeing’s ability to sustain profit from its 787 Dreamliner after a decade of losses, while it transitions to new versions of its cash-cows, the 737 narrow-body jet and the 777 wide-body.
Several sales campaigns now underway will determine the near-term course for its largest twin-engine aircraft, the 777. Lagging orders already prompted Boeing to slow its assembly line to a monthly pace of seven jets starting early next year. The manufacturer had planned to deliver just 5.5 of the planes a month in 2018 as it builds the first flight-test planes for the upgraded 777X family of aircraft, which are slated to enter the market at the decade’s end.
In the worst case, output could slip to 3.5 planes a month before speeding up as production shifts to the 777X, Mr Muilenburg said.
“Across all of those scenarios that I just described, all of them, we see cash growing year-over-year in 2017 and then again in 2018,” he said. “And I think that’s an important thing to remember. This is a very robust cash growth business across all of those scenarios.”
Third-quarter earnings rose to $3.51 a share after adjusting for some pension expenses, Boeing said. That topped the $2.67 average of analysts’ estimates compiled by Bloomberg. Free cash flow of $2.61 billion exceeded the $2.02bn expected.
Boeing also reported a $162 million accounting charge related to the the CST-100 Starliner spacecraft it is developing to ferry astronauts to the International Space Station. The company postponed its commercial crew test and development programme for Nasa by six months because of supply-chain delays and a production flaw that forced the project to scrap the upper dome of the capsule to be used in the first manned flight test.
“The Boeing story continues to be all about execution and cash generation and this quarter didn’t disappoint despite a small hiccup in the company’s Space division,” said Jason Gursky, an analyst at Citigroup.
Deferred production costs for the 787 Dreamliner fell by $150m, or $4m per plane, from the previous quarter to $27.5bn as Boeing worked to reap cash from the marquee aircraft.
The first jetliner made from strands of spun carbon fibre is key to Mr Muilenburg’s plan to achieve operating margins in the mid-teens and his vow to return 100 per cent of free cash flow to shareholders despite the demands of developing new aircraft and the risk of political and economic turmoil.
Mr Muilenburg has stressed cost cutting and set a goal of double-digit profit margins for commercial jets next year.
Since 80 percent of its deliveries through 2020 are firm orders and already priced, “that means that any additional cost reduction will go straight to the bottom line, rather than be competed away”, said Douglas Harned, an aerospace analyst with Sanford C Bernstein. “But, we would like to have more confidence that Boeing commercial airplanes truly can make progress on margin.”
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