Record airplane deliveries in 2015, EPS that beat market expectations, further cash flow improvements combined with ending the year having a $500 billion order backlog across the group not to mention having produced record commercial aircraft revenues in 2015 and importantly, margin improvements in space and defence, should have been confirmation enough that Boeing had a pretty good year in 2015.
So if that is correct it is reasonable to ask why investors gave little more than a lukewarm response to fourth quarter and FY2015 Boeing results today? The answer appears to be that Boeing posted guidance figures that were a touch less than markets had been hoping for. In its guidance figures Boeing said that it sees adjusted FY2016 Earnings per share (EPS) being in the region of $8.15 to $8.35 on revenue that is anticipated to be in the range of $93 to $95 billion. Consensus estimates for EPS had been $9.43 based on revenue expectations of $97.17 billion. Boeing also said that it expects to deliver between 740 to 745 aircraft this year compared to 762 aircraft delivered in 2015.
Does reduced guidance suggest that something is wrong at Boeing? Hardly and nothing can take away that in 2016, a year that the company celebrates its 100th anniversary, Boeing finds itself in rude health. Even so, markets are I believe probably correct to take a view that the fantastic cycle of growth that has been witnessed in the global commercial aerospace industry over the past few years may now have peaked – albeit in my view only temporarily.
Should investors be concerned about any signals that the slightly lower than anticipated guidance outlook from Boeing might be suggesting? In all honesty not really in my view because anyone that had not anticipated that a cycle of growth that in effect has already lasted the best part of twelve years would not at some point peak for a while might better stand accused of living in ignorance of both history and fact.
None of this seeming negativity in the part of the investment community is to ignore that Boeing moves forward from here in a formidable position of financial and market strength. FY15 results produced enough evidence of an all-round strong performance and on that basis the arguably best that we have seen from the Chicago based company in many a year. Other positives emerge too such as the marked improvement in 787 production costs and that I would suggest will look better still in 2016.
Commercial Airplanes booked 768 net orders during the year of which 321 were in the final quarter. Net orders taken on across all Boeing divisions totalled $83 billion during the year and with cash and investments in marketable securities having risen by over $2bn during the year and debt standing at a comfortable $10bn the balance sheet looks to be very strong. Share repurchases have continues with $47 million repurchased at a cost of $6.8 billion. The current share purchase reauthorisation plan stands at $14 billion.
Against positive news must be recognition of what Boeing announced last week when the company said that it would reduce production of the slow selling 747-8 passenger/cargo jet to just one aircraft every other month and that it was taking a $569 million after tax charge in the fourth quarter to cover the cost of scaling this back. Some analysts have for some time been expecting a small cut in 777 production to be announced shortly although there was no sign of this in the results statement.
From my perspective though good new outweighs bad. Pleasingly there was some improvement in defence both is sales, earnings and margins. In Commercial Airplanes with an order backlog of 5,795 airplanes at the end of 2015 of which no less than 3,072 are firm orders for the company’s best-selling 737 aircraft and with the first flight of the new 737 MAX aircraft tentatively scheduled for Friday of this week and first deliveries to airline customers due to occur next year there is plenty to look forward to.
Note too that Boeing has, as I witnessed myself when visiting Everett and Seattle last year, made significant changes in how the new generation 737 MAX planes and which have already captured just short of 3,100 orders since the programme was launched, will be built. Reflecting changes in production technology available and better ways to produce suffice to say that production engineering changes have required significant investment by Boeing over the past few years. My view is that analysts have not yet built any of these potential cost benefits in and that on the basis that they will be seen gradually over the years ahead particularly after production of the traditional 737 has begun to wind down in a few more years’ time there is plenty still to go for even if the current commercial aerospace cycle may have temporarily peaked.
I will leave you with two thoughts. The first is what CEO Dennis Muilenburg said within the results statement “Our priorities for 2016 and beyond are to build on our existing strengths to deliver on current plans and commitments, and to stretch beyond them by accelerating progress on key enterprise growth and productivity initiatives, investing in our team, and creating more value and opportunity for our customers, shareholders and employees,”
The second is that the current Boeing market outlook forecasts covering the period 2015 to 2034 suggest 38,050 aircraft deliveries with a value of more than $5.6 trillion being required and that by 2034 the global fleet of commercial passenger jets will have risen to 43,560 form and end year 2014 figure of 21,600 currently in service. Who was it that said the aerospace cycle had peaked? If it has I suggest that it is only temporary.
CHW (London 27th January 2016)
Howard Wheeldon FRAeS