Boeing’s ‘Monster’ Cash Haul Gives New Lift to Top Dow Stock

(Bloomberg) -
Workers check over the new Boeing 787-10 Dreamliner after its first test flight at the Charleston International Airport in North Charleston, South Carolina, in March. (Reuters/Randall Hill/File)

Boeing squeezed more cash out of its 787 Dreamliner jet program during the second quarter, handed billions of dollars back to shareholders and raised its profit forecast.

Even those advances were overshadowed as free cash flow surged to $4.51 billion. That was more than double the tally analysts had expected — and the company channeled $3.4 billion of the haul to stock buybacks and dividends. The Chicago-based planemaker on Wednesday also announced plans to bolster its pension funding with company shares.

The results extended a formula that has propelled the world’s largest aerospace company to the top of the Dow Jones Industrial Average this year. Boeing has improved productivity in its factories, then made good on pledges to increase cash flow and lavish the gains on shareholders.

“This is about as close to perfect as it gets from Boeing,” Robert Stallard, analyst with Vertical Research Partners, said in a report to clients that centered on the company’s “monster” cash generation. “A significant cash flow beat, a meaningful increase to guidance from operations, and no execution issues.”

Boeing jumped 7.9 percent to $229.20 at 10:02 a.m. in New York after rising as much as 8 percent in the biggest intraday jump in almost eight years. The shares had already climbed 36 percent this year through Tuesday, more than tripling the Dow’s advance, as the manufacturer’s record stockpile of airplane orders offered investors an assuring glimpse of future sales and cash.

The manufacturer raised its forecast for adjusted earnings this year by 60 cents to $9.80 to $10 a share. It also boosted the outlook for operating cash flow by $1.5 billion to $12.3 billion.

Boeing is poised to continue generating a cash gush as it speeds work in its factories to capitalize on a record backlog for the single-aisle 737, the company’s largest source of earnings. Falling manufacturing costs for the newly profitable 787 jetliner are another source of strength, and a counterbalance to curbed production of the 777.

The balance of inventory and factory costs for the Dreamliner fell $531 million to $26.5 billion during the second quarter. The measure shrank $316 million during the first quarter to $27 billion.

The company has promised a steep improvement in cash and savings from the Dreamliner as it refines the plane’s manufacturing process, mainly builds the higher-margin 787-9 and -10 variants and no longer has to compensate airlines for late deliveries.

Boeing’s second quarter earnings, adjusted for certain pension expenses, were $2.55 a share compared with a 44-cent loss a year earlier. Analysts had expected $2.30 a share, according to the average of estimates compiled by Bloomberg. Revenue fell 8.1 percent to $22.7 billion. Analysts had predicted $23 billion.

The manufacturer also said it would contribute $3.5 billion of common stock to its pension plan during the third quarter, eliminating mandatory funding requirements through 2021. The move will also provide $700 million in cash tax savings that enabled Boeing to boost its cash guidance for the year.

Boeing delivered 183 jetliners in the quarter, 16 fewer than a year ago. The tally included seven fewer 777s, which provided a drag on sales as the manufacturer starts to build the first of an upgraded model. Dreamliner deliveries also dipped as the company built flight-test aircraft for the -10, the newest and largest member of the 787 family.

“On first blush, share repurchases are driving a lot of the gain, but margins and cash flow look good even at slightly less deliveries,” said George Ferguson, analyst at Bloomberg Intelligence.

Investors increasingly have focused on cash as a proxy of the company’s underlying performance as slowing jetliner sales limit revenue growth, while share repurchases and adjusted earnings muddy traditional financial measures.

“You can never argue with cash,” said Ken Herbert, an aerospace analyst at Canaccord Genuity, in an interview prior to the earnings release. “Boeing is unique relative to other large cap industrials, even aero and defense stocks,” for the importance investors place on its cash flow relative to adjusted per-share earnings.

“As long as cash per share is growing, you’re monetizing this backlog and it’s going to shareholders. It’s obviously done really well for the stock,” he said.

An extended stock buyback spree has reduced the denominator used to calculate earnings. Boeing directors in late 2013 approved what at the time was the largest repurchase plan in company history.

Since then, the pool of shares outstanding has shrunk by more than 143.8 million — 19 percent — to 603.6 million shares, according to data compiled by Bloomberg. And Boeing has spent $27.5 billion on its own stock during the period. If all goes to plan, the largess would be more than double the estimated $10 billion to $15 billion investment that Boeing needs to develop an all-new mid-range jetliner.

The commercial airplane business posted an operating profit of $1.67 billion compared with a $973 million loss a year earlier, when it absorbed costs for the KC-46 tanker, 747 and earliest 787 Dreamliners. The unit’s operating margin improved to 10 percent from -5.6 percent.

The defense division’s profit climbed 50 percent to $890 million from a year earlier, although a revenue dip reflected the end of C-17 transport deliveries last year. Its operating margin improved to almost 13 percent from 8.3 percent as the delayed tanker program didn’t generate any significant accounting costs.

Boeing didn’t provide results for a third business, Boeing Global Services, which was created July 1.