Boeing Leads Dow as Boost to Cash Outlook Eases Trade-War Alarms

(Bloomberg) -- Boeing Co. is restoring at least a little confidence in the outlook for U.S. industrial companies.

The planemaker smashed profit estimates and boosted its forecast for cash and earnings, pushing shares to the biggest gain on the Dow Jones Industrial Average. The strong performance reassured investors that perhaps the market hasn’t peaked for all manufacturers -- an appealing message a day after Caterpillar Inc. said the first quarter would be the “high watermark” for 2018.

“There are broader concerns with trade and companies calling the top of the market,” Ken Herbert, an aerospace analyst at Canaccord Genuity, said in an interview Wednesday. “But this was very clean and very strong.”

The robust results underscored the strengths that made Boeing the best performer on the Dow for most of the past year. The company was recently dethroned by Cisco Systems Inc. as President Donald Trump’s trade salvos rattled markets. Investors sold off Boeing as aluminum prices went on a wild ride, and again when China threatened penalties for the 737, the manufacturer’s largest source of profit.

None of the aerospace-related tariffs has been implemented, Boeing Chief Executive Officer Dennis Muilenburg reminded analysts during an earnings call Wednesday. “We’re hopeful for a positive outcome from the discussions between the U.S. and China,” he said.

The shares climbed 3.9 percent to $341.97 at 2:04 p.m. in New York. Through Tuesday, they had gained 12 percent this year, while the Dow fell 2.8 percent.

Analyst Upgrade

Free cash flow climbed to $2.74 billion, Chicago-based Boeing said in a statement. That topped the average analyst estimate of $1.49 billion, a sign the company’s underlying business remains healthy.

Adjusted earnings rose to $3.64 a share, handily beating the $2.58 average of estimates compiled by Bloomberg. Revenue increased 6.5 percent to $23.4 billion. Analysts had predicted $22.2 billion.

“Well it’s not every day that a mega-cap company beats consensus by 40 percent,” Robert Stallard, an analyst with Vertical Research Partners said in a note to clients. He later upgraded Boeing to a buy, writing that “the wall of cash that the company is generating makes it hard to be absent from the stock.”

Production Strains

There are signs of strain, however, as engine makers and other suppliers struggle to keep pace with the record production tempo for the single-aisle 737. Almost half of Boeing’s 184 jet deliveries in the quarter occurred in March, after a sluggish start. The company delivered 35 of the upgraded 737 Max planes in the quarter, nine fewer than Credit Suisse had expected.

Despite the early hiccups in shipments of engines and fuselages for the Max, Boeing expects the aircraft to account for about 40 percent to 45 percent of its single-aisle deliveries this year, Boeing Chief Financial Officer Greg Smith told analysts.

“We’re confident that we’ll continue to ramp up and hit our delivery marks,” he said.

Boeing has worked hard to improve productivity in its factories, while making good on pledges to increase cash flow and share the gains with shareholders. Deferred production costs for the 787 Dreamliner fell $668 million to $24.7 billion, freeing up cash.

The company’s commercial airplane and defense divisions made progress toward the mid-teen profit margins set by Muilenburg, reporting operating margins of 11 percent and 11.3 percent, respectively. The measure declined slightly to 16.3 percent for Boeing Global Services, a new division offering spare parts, maintenance and other services.

Boeing now expects its jetliner business to generate an operating margin of about 11.5 percent for the year, compared with the January estimate of more than 11 percent. The company also raised its operating cash flow forecast to a range of $15 billion to $15.5 billion, from the previous forecast of $15 billion.

Share Buybacks

The company spent $3 billion during the quarter repurchasing 8.9 million shares, more than the $2.5 billion that Bloomberg Intelligence had modeled, said analyst George Ferguson. “There’s something for everyone here,” he said of the results.

But investors who have fixated on Boeing’s cash generation are starting to take a broader look at its production and market risks as the company plots its first all-new aircraft family since the carbon-composite 787, according to Canaccord’s Herbert.

As the launch of the new mid-range family approaches, “I think for a lot of people that will represent a shift in sentiment,” he said in an interview before the earnings were released. “It will translate from a free cash flow story to more of a bet on the environment” in the broader market.

--With assistance from Herb Scheuren (Bloomberg Global Data).

To contact the reporter on this story: Julie Johnsson in Chicago at jjohnsson@bloomberg.net.

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Tony Robinson

©2018 Bloomberg L.P.