By Shen Lu
Boeing Co. on Wednesday reported a 59 percent surge in fourth-quarter earnings and a “robust” multi-year order backlog. The increase well topped analysts’ estimates, and shares leapt 4 percent.
The Chicago-based aerospace giant said net income for the fourth quarter ended Dec.31, 2016, was $1.63 billion, or $2.59 per diluted share, up from $1.03 billion, or $1.51 per diluted share, in the prior year period. The consensus estimate was $2.38 per diluted share, according to Bloomberg.
Revenue slid 1 percent to $23.29 billion from $23.57 billion, led by slowdown commercial orders.
The plane maker generated a $10.50 billion operating cash flow in 2016, exceeding its earlier target of $10 billion, which Wall Street sees as a positive sign of its growth potential.
Analysts said the world’s largest aerospace company by sales had a solid fourth quarter.
“Overall we have a favorable long-term outlook on the aerospace sector, and I think Boeing is well-positioned to participate in that growth,” Edward Jones analyst Jeff Windau said in a phone interview.
Boeing reported a backlog of more than 5,700 commercial aircraft orders worth $473 billion, which will carry the plane maker for at least six years.
“If they did not get another order, it would take about seven years, at their current line rates, to build all these planes,” Windau said. “It’s definitely a nice cushion.”
Boeing said net income for all 2016 fell 5 percent to $4.90 billion, or $7.61 per diluted share, from $5.18 billion, or $7.44 per diluted share, in 2015. Revenue for the for year fell 2 percent to $94.57 from $96.11 billion.
For 2017, Boeing expects full-year earnings in the range of $10.25 to $10.45 per share, higher than Wall Street estimates of $9.48 a share. While forecasting commercial aircraft deliveries to be between 760 and 765 units, the company issued full-year revenue guidance to be in the range of $90.5 billion to $92.5 billion, lower than estimates of $92.78 billion. The company expects operating cash flow to rise by $250 million to $10.75 billion and capital spending to fall by $300 million to $2.3 billion.
“Looking forward, our team is intent on accelerating productivity and program execution to deliver increasing cash and profitability from our large and diverse order backlog of nearly $500 billion, standing up our new integrated services business, and capturing an even greater share of the the growing global aerospace market to deliver superior value to our customers, shareholders and employees,” CEO Dennis Muilenburg said in the company’s earnings press release.
However, analysts are concerned about Boeing’s slowing sales of its profitable 777 program as customers await its successor, 777X, which is expected to be delivered around 2020.
Boeing has responded to the declining orders of the 777 model with production cuts. The company said the production rate will be further reduced to five jets per month in August from the current rate of seven per month.
“The slowing sales of the 777 does worry me because with the new model they are betting they are having a further demand over the next several years, so I have to kind of see how that plays out,” Windau said.
On the defense and space side, Muilenburg said Boeing sees it as a “healthy core business,” and expects a low-to-moderate revenue growth in 2017, as it sees signs of an increasing defense budget and a higher international demand.
Yet analysts are not as optimistic.
“We expect the defense business to be a no-growth business over the next several years,” Chris Higgins, a Chicago-based analyst with Morningstar Inc., wrote in his research note before the earnings release. “In our view, a tight U.S. fiscal environment will constrain increases in defense spending regardless of which political party is in power.”
Boeing will also face rising competition from its European rival Airbus and potentially some margin and profitability pressure due partly to the decline in 777 production, Windau said.
In Boeing’s defense business, President Donald Trump has taken issue with the pricing of the new version of Air Force One and fighter jets. Boeing vowed last week to simplify requirements for Air Force One, the presidential jumbo jet, and streamline the process to lower the cost of the program, which could put pressure on the company’s profitability, Windau said.
Boeing is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!
— Donald J. Trump (@realDonaldTrump) December 6, 2016
Analysts said Boeing’s future lies in its commercial sector, which accounts for nearly 70 percent of the aerospace company’s business.
Programs like 787 and 737 — whose sales are holding up well — are where the focus is, Windau explained, and the plane maker’s future growth will be primarily coming from emerging markets like Asia where airlines look to continue expanding numbers of flights.
Future in the Trump era
Reporters actively participated in the Q & A section in the conference call, focusing on the future outlook for the company under Trump’s presidency.
Muilenburg reaffirmed Boeing’s commitment to building manufacturing jobs in the U.S.after his second meeting with President Trump last week. Muilenburg announced after the meeting that Boeing would lower prices on the Air Force One upgrade and committed to investing in manufacturing in the U.S.
In response to journalists’ questions regarding Boeing’s strategies for China, one of Boeing’s most important growth markets in the world, Muilenburg said a healthy trade relationship between the U.S. and China is important for Boeing to build manufacturing jobs in the U.S., and he said the Trump administration understands that.
With 75 percent of the plane maker’s products being exported while 90 percent of its employees are in the U.S., Muilenburg said he believes Boeing will continue to drive growth in the global economy by enabling international travel and cargo delivery.
Muilenburg said Boeing will continue to “engage and work very closely” with the Trump administration.
“We’re encouraged by the pro-business agenda,” Muilenburg said. “We think it’s going to be good for jobs growth, it’s going to be good for the economy, and in the end good for the aerospace sector and for Boeing.”
Boeing stock closed at $167.36 Wednesday, up $6.81 from Tuesday’s close.