Boeing (BA, Financial) reported weaker-than-expected fourth-quarter earnings on account of a charge the aircraftmaker took for a cut in the production of the 747-8 jumbo jet. The company’s shares tumbled to $115.70 following the earnings announcement and the 2016 guidance.
The quarter at a glance
Boeing generated revenue of $23.57 billion in the fourth quarter, down 4% from a year earlier. Boeing’s fourth quarter net income dropped to $1.03 billion, which translates to $1.51 a share. The company had recorded a net income of $1.47 billion, or $2.02 a share, in the fourth quarter of 2014.
Its core earnings reduced to $1.60 a share compared with $2.31 a share registered a year ago. This is attributable to the 747-8 production scale-back charge. The planemaker said the $569 million after-tax charge was due to a sluggish air cargo market. Boeing has trimmed the production rate of the jumbo jet from one a month to one in two months. This will be effective from September. Boeing's vice chairman, Ray Conner, said, "Global air passenger traffic growth and airplane demand remain strong, but the air cargo market recovery that began in late 2013 has stalled in recent months and slowed demand for the 747-8 Freighter."
Boeing’s cash flow stays strong as the company produced $9.4 billion from operating activities. However, this is a tad below the $9.6 billion generated in 2014. Also, Boeing predicted making $9.5 billion in operating cash in its most recent guidance.
Strong deliveries
Boeing reported record deliveries in 2015 by dispatching 762 planes and surpassing its own projection. The company dispatched 182 planes in the last quarter. Boeing delivered 120 737 aircraft, which happens to be the company’s bread-and-butter aircraft. The 787 Dreamliner, the first-ever revolutionary plane made of composite material, saw second-best deliveries during the quarter.
Source: Boeing
The 787 Dreamliner is yet to churn profits for the planemaker. The aircraft’s deferred cost rose another $201 million and now stands at $28.5 billion. This means that the company sold each Dreamliner at an average loss of nearly $6 million during the last quarter. The company is hopeful to turn the program cash positive very soon. Boeing expects the deferred production cost to drop once the production rate reaches 12 per month, which is scheduled to happen later this year.
Boeing lowers 2016 outlook
Boeing said that it expects to deliver fewer planes in 2016 in comparison to 2015. It has given a target range of 740 to 745 planes. That compares with a record 762 aircrafts dispatched in 2015. There are two reasons behind the lower deliveries. First, the company will manufacture fewer 737s in the current year as it shifts from the 737 to the 737 Max. Second, Boeing is also assuming a cut in the 747-8 production rate as demand for the aircraft remains dull.
Boeing forecasts 2016 core earnings per share to come in between $8.15 and $8.35, which is quite below the average analyst earnings per share estimate of $9.43. The jetmaker expects to generate around $10 billion in operating cash flow during the year. This has also raised anxiety among analysts.
Last word
It is evident from the stock price movement that investors weren’t happy with the dull guidance for 2016. However, long-term investors could consider investing in the stock –Â for the stock price fall provides a good entry point. Also, the cash flows are expected to get stronger with the entry of the 737 Max and 777X at the end of the decade. The 787 Dreamliner will also begin contributing toward cash generation, although it will be interesting to see how the company manages to lower the cash drain per aircraft sold.
Disclosure: I have no positions in any stocks mentioned in this article.
