When aerospace giant Boeing Co. (NYSE: BA) reports second-quarter earnings before the markets open Wednesday, the company is expected to post a net loss per share of $0.92. That compares with earnings per share of $1.62 in the second quarter of 2015. Revenues are tagged at $24.04 billion, compared with year-ago revenues of $24.54 billion.
The loss is entirely due to last week’s announcement of $3.23 per share in charges against three of the company’s aircraft programs: $847 million ($1.33 per share) for two unsold 787 Dreamliner test planes that will now be written down to R&D expense and lower deferred production costs by less than 3%; $814 million ($1.28 per share) to reflect lower estimated total 747-8 freighter production; and $393 million ($0.62 per share) for development costs on the KC-46A U.S. Air Force tanker program.
Boeing delivered a total of 199 commercial jets in the second quarter of 2016, essentially flat compared with 197 deliveries in the same period last year. This year’s total includes 127 737s, 28 777s, and 38 787 Dreamliners. Second-quarter deliveries also include two 747s and four 767s, compared with last year’s totals of five 747s and four 767s. Boeing delivered a total of 762 commercial planes in 2015.
Barclays analysts said that the quest for a clean quarter continues. The bank’s analysts rate the stock Overweight with a $155 target price and made this comment:
We expected a Q2 charge from BA on the tanker program delays associated with recent hardware changes, which frankly we saw taking away the potential for the type of clean beat/raise quarter that we grew accustomed to before the last year and a half.
The analysts go on to say that they did not expect the charges to the 747 and 787 programs and that, “All in, we look at the announcement from two principal angles – consistency in performance and cash flow.”
Deutsche Bank has a Buy rating on the stock and $160 price target. The firm’s Myles Walton and his team said there was no change or impact to estimates from the charges on the 747 and 787 programs. Here is some additional detail:
The 787 program accounting could now likely absorb a decision to not go to rate 14 later in the decade (consistent with our model) without a forward loss charge. Because we don’t use the 787 inventory as a starting point for cash estimates, the charge has no impact on our FCF estimates. (our model assumes BA won’t recoup up to $10B of the deferred inventory through 2021). We had expected the write off of the remainder of the 747 inventory but were only unaware of the timing. With this $1.2B pretax charge ($814M/$1.28 aftertax), the 747 inventory was written off and 19 aircraft were removed from the block. There were no changes to our cash model from the 747 charge.
Merrill Lynch has an Underperform rating and a $125 price objective on the stock. After lowering estimates for the quarter and the year, the Merrill Lynch team said:
Is buying back stock the best use of cash? At first glance, investors typically view share repurchase as positive. However, considering the cyclicality and capital intensive nature of commercial aerospace, we wonder whether Boeing’s buy-back of a significant amount of stock in the current environment is the best use of cash. Boeing is facing execution issues, as highlighted by the charges recorded today, uncertain global macroeconomic environment, increased political instability, which could in turn hurt global air travel, and the prospect of investing in a new clean sheet Middle of the Market aircraft.
Using Boeing’s reported after-tax and EPS figures for the charge, we calculate that Boeing’s average diluted share count was 636mn in 2Q16. We note that Boeing’s average diluted share count in 1Q16 was 666mn, but the company ended the quarter at 650mn shares. Assuming a simple average, we estimate that Boeing repurchased 28mn shares in 2Q16, which factors in an ending share count of 622mn. If we assume that Boeing paid an average price of $130 per share in 2Q16, we estimate share repurchase of $3.64bn in 2Q16.
Cash is the common theme here. Two analyst teams see no change in Boeing’s cash flow and the other wonders whether stock buybacks are the best use of the company’s cash. Boeing has forecast cash flow of around $10 billion for 2016, and you can take it to the bank that the company will at least meet that goal.
Earlier this year the company changed the way it pays its bills and at least one supplier, Rockwell Collins, complained on Monday that it has not received second-quarter payments of $30 million to $40 million that Boeing owes it. Boeing has told vendors that it will take 120 days to pay rather than its previous practice of paying in 30 days. That’s certainly one way to keep that cash flow number up there.
Shortly after noon on Tuesday, the stock traded at $133.62, up about 0.5% on the day, in a 52-week range of $102.10 to $150.59. The consensus price target on the stock is $145.81.
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