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BOEING Q4 – MANY A SLIP!

BOEING Q4 – MANY A SLIP!
By Howard Wheeldon, Senior Strategist at BGC Partners

25 Jan 12. The superb 20% jump in fourth quarter FY11 profits from Boeing was unfortunately marred by a much weaker than anticipated FY12 earnings outlook. Projecting forward FY12 earnings in the $4.05 to $4.25 per share region that are well below what many analysts anticipated left Boeing shares quickly headed into the red. Analysts generally dislike surprise unless it is on the upside and having had so many shocks from Boeing in recent years they were in no mood to take prisoners today.

To be fair segmental Q4 profit performance from commercial on the back of much higher aircraft deliveries and revenues had been very much better than anticipated. Even defense, space and security chucked in half decent earnings improvements but sadly in the wake of large scale cuts in US defense spending and those announced elsewhere it seems that the 6% earnings improvement in defense was just about as good as it was going to get for a while. For the current year Boeing is not surprisingly predicting a fall in defense related earnings that is roughly equal to the gains seen during the past year.

The good news is that having delivered ‘just’ 477 commercial airliners during this past year the company is now forecasting deliveries of between 585 and 600 airliners during the current year. Earnings from the commercial aircraft division rose 56% on revenue that was up 31% and the total order backlog for the Group at year end including $103bn of orders received during the year was stated at $356bn – up from $321bn at year end FY10. Rising pension expenses aside the bad news is that even the top end $4.25 earnings projection for FY12 is around 20% below what many analysts had anticipated.

Analysis: With certification issues now behind them and production and delivery of both the ‘787’ and 747-8 aircraft likely to grind up reasonably well during the coming year combined with continued solid performance from 737 and 777 deliveries the outlook for improved 2012 operating performance from commercial certainly looks assured. In group terms margin performance has been much improved although with defense headed to the doldrums further improvement looks difficult to sustain. Another plus last year was the noticeable improvement in operating cash flow to $4bn (FY10 $3.3bn) – this now perfectly matching net profits. With an order backlog at commercial of over 3,700 aircraft and with little sign yet that financing is becoming harder for well heeled airlines assuming that industrial issues are stable we have little concern that Boeing will more than meet its self set targets for commercial aircraft in 2012. Though the company paid a price for dithering on the 737MAX it does seem likely that the company has the potential part make up the large gap established by its rival Airbus in the form of the A320NEO.

We note that Boeing plans to spend $2bn on capital projects this year and to continue spending high levels or research and development – this put at $3.3bn to $3.5bn in the current year. The bottom line is that after several years of mixed and often poor performance from Commercial market attention will now focus increasingly on defense. Even given the outlook warnings from the company the forward situation for most defence players is about as clear as mud. While Boeing has much to be concerned about in defense it also has much to commend it as large orders for the F-15S from Saudi Arabia received during the past few months demonstrate. At the end of the day we do not yet know the extent that defense cuts in terms of equipment purchases will hit large contractors such as Boeing. As always in situations like this much will depend on State politics and the fight to protect jobs in individual states. In an election year perhaps not all is yet lost!

Detail of Results

The Boeing Company (NYSE: BA) reported fourth-quarter net income rose to $1.4bn, or

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