Tags: Boeing | shares | 787 | Cost

Boeing Shares Fall as Investors Fret about 787 Cost Concerns

Wednesday, 22 October 2014 05:43 PM

Shares of Boeing Co. fell the most on the Dow Jones industrial average Wednesday as investors signaled concern that the world’s largest planemaker isn’t moving fast enough to curb costs on the 787 Dreamliner.

While Boeing boosted its 2014 earnings forecast by 20 cents a share and beat third-quarter profit estimates, the results were overshadowed by the expense tied to making the 787, the carbon-fiber jet on which the company still loses money. Investors worry the Dreamliner is a drag against cash that Boeing should be reaping from a record order backlog.

“The decline in Boeing’s share price is due to the disappointing free cash flow generation,” said Jeff Morris, who heads U.S. equities at Standard Life Investments, which has $337 billion in assets under management. “Deferred production costs on the 787 grew more than expected and commercial margins disappointed.”

Boeing slid 4.5 percent to $121.45 at the close in New York, the biggest drop among the 30 Dow stocks and its largest plunge since Jan. 29. The shares retreated from a gain in early trading after the Chicago-based company failed to assure investors that 787 costs were near their peak, Morris said.

Production Costs

The expense is an accounting measure that is supposed to drop as a projected gain in efficiency reduces assembly costs on the plane, which entered service in 2011 more than three years late. Instead, that gauge rose 3.9 percent to $25.2 billion from the previous quarter, Boeing said. Last year, Boeing estimated a ceiling for the deferred production cost of about $25 billion, up from $20 billion.

“The buy side was looking for about a $700 million to $800 million increase and it came in closer to $1 billion,” Morris said in a phone interview. “The market has gotten a little bit more concerned about what that number might actually be.”

Free cash flow fell 86 percent to $317 million, Boeing said, citing a drag from pension expenses and advance payments to Dreamliner suppliers. Chief Financial Officer Greg Smith said the 787 will be “cash positive” in 2015.

“The only slight increase in the cash-flow outlook coupled with 787 deferred production topping $25 billion will increase the bear calls for higher 787 costs and lower cash-flow estimates,” Peter Arment, a Sterne Agee & Leach Inc. analyst in New York, wrote in a note to investors. He rates Boeing as buy.

The result raises questions about whether Boeing can boost free cash flow by 32 percent to achieve the $6.97 billion average estimated by 11 analysts surveyed by Bloomberg, Morris said.

Little Comfort

“They didn’t offer a lot of comfort on how much that would increase,” he said. “They just said free cash flow would be up in ’15. There can be a difference between ‘up’ and ‘up 30 percent,’ which has the market concerned.”

Boeing is benefiting from orders outpacing analysts’ estimates and record output of its top-selling 737 jet. Earnings for 2014 excluding some pension expense will be $8.10 to $8.30 a share, Boeing said Wednesday, topping July’s projection of $7.90 to $8.10. Analysts had estimated full-year profit of $8.29 a share, according to data compiled by Bloomberg.

Quarterly profit of $2.14 a share exceeded the $1.97 average estimate of 20 analysts surveyed by Bloomberg. Sales rose 7 percent to $23.8 billion, exceeding analysts’ average estimate of $23 billion.

Boeing won 1,000 net aircraft orders through September, “exceeding what we believed the figure would be for the full year,” Stephen Levenson, a Stifel Financial Corp. analyst in New York, wrote in a note.

Commercial Revenue

Commercial-aircraft deliveries totaled 186 in the quarter, pushing the year-to-date total to 528. The narrow-body 737 accounted for 120 deliveries last quarter, up from 112 a year earlier, after Boeing raised monthly output to 42 from 37.

Revenue at Boeing Commercial Airplanes rose 15 percent to $16.1 billion, Boeing said. That segment has taken on a greater share of sales as the second-largest U.S. defense contractor feels the sting of Pentagon budget cuts.

Cost-cutting efforts have bolstered margins at the defense, space and security business. Profit for the defense unit rose 27 percent to $856 million even as sales fell 2 percent, Boeing said. Operating margins rose 2.4 percentage points to 10.8 percent.

Record Backlog

Boeing’s backlog of more than 5,500 jetliners is valued at a record $430 billion, compared with a $60 billion defense backlog, the company said. The company’s order backlog of civilian jets is sufficient to keep its factories humming for at least seven years, depending on the model, according to Bloomberg Intelligence estimates.

Assembly lines for the 737, 787 and 777 jets are all making planes at a record pace, though monthly production for the 777 may need to be slowed by late next year unless more orders come in, according to an Oct. 19 note from Ken Herbert, a Canaccord Genuity Inc. analyst. Airlines have been looking ahead to the upgraded 777X due at the end of this decade.

Boeing calls its per-share results excluding some expenses “core earnings.” The planemaker adopted the measure last year, saying it gives a clearer picture by adjusting for market fluctuations in pension costs. Net income rose 18 percent to $1.36 billion, or $1.86 a share, from $1.51 a share a year earlier.

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Shares of Boeing Co. fell the most on the Dow Jones industrial average Wednesday as investors signaled concern that the world's largest planemaker isn't moving fast enough to curb costs on the 787 Dreamliner.
Boeing, shares, 787, Cost
Wednesday, 22 October 2014 05:43 PM
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