Boeing's Cash Surge Creates Rare Bright Spot Amid Industrial Woe

(Bloomberg) -- Boeing Co. revved up cash flow and raised its profit forecast, soothing shareholder concerns over an operating loss in its defense business and production stumbles with the company’s best-selling 737 jets.

Free cash flow jumped 37 percent to $4.1 billion in the third quarter, more than double analysts’ estimates. The planemaker also reported higher-than-expected earnings, raised its annual profit forecast and predicted that sales would reach a record $100 billion.

Boeing's Cash Surge Creates Rare Bright Spot Amid Industrial Woe

The results underscored the strength of Boeing’s commercial-aircraft business as the world’s largest aerospace company benefits from booming global demand for air travel and a $491 billion order backlog. For now, at least, investors looked past an operating loss at the defense business after Boeing booked $691 million in accounting charges for two high-profile contract wins from the Pentagon.

“There is a lot going on under the hood in Boeing’s Q3 but with regard to what the market cares about most -- that Boeing generates a lot of cash -- the results delivered,” Seth Seifman, an analyst at JPMorgan Chase & Co., said in a note to clients Wednesday.

The shares climbed 3.2 percent to $361.30 at 12:20 p.m. in New York, the biggest gain on the Dow Jones Industrial Average. Boeing rose 19 percent this year through Tuesday, bucking a selloff that afflicted other industrial titans such as 3M Co., Caterpillar Inc. and DowDuPont Inc.

Cash Focus

Investors have increasingly focused on free cash flow since Boeing earnings are adjusted for pension expenses and the company has pledged to plow an equivalent amount into shareholder returns. But the cash bonanza’s durability was called into question as the company failed to boost its full-year outlook for the measure.

During the third quarter, Boeing spent $2.5 billion on its own stock and paid $1 billion of dividends. The results were bolstered by a $412 million one-time tax benefit related to an audit in 2013 and 2014. The company also got a cash gain from a decline in the balance of inventory and factory costs for the 787 Dreamliner, which dropped $667 million to $23.6 billion.

Boeing's Cash Surge Creates Rare Bright Spot Amid Industrial Woe

Adjusted earnings rose to $3.58 a share, Boeing said in a statement. Analysts had expected $3.47, according to the average of estimates compiled by Bloomberg. Revenue climbed 3.8 percent to $25.1 billion, topping the $23.9 billion analysts had predicted.

Jetliner Strength

Investors had held low expectations for the third quarter after supplier strains left dozens of unfinished 737 jetliners, the company’s main source of profit, parked around a Seattle-area factory.

But the results underscored strength in the commercial airplane business despite the headline-grabbing factory snarls, which have forced the company to spend more to complete dozens of the undelivered narrow-body aircraft.

Boeing reaffirmed that it would deliver between 810 and 815 airliners this year, despite a slowdown earlier in the third quarter. The Chicago-based manufacturer had handed off 568 commercial aircraft to customers as of the end of September.

Operating margin for the commercial division, which generates about two thirds of Boeing’s sales, rose 3.4 points to 13.2 percent, moving toward the mid-teen goal set by Chief Executive Officer Dennis Muilenburg. The measure was 13.3 percent for the company’s global-services business.

Defense Charges

While the defense unit posted a 13 percent sales gain, it posted an operating loss equal to 4.3 percent of revenue as a result of one-time accounting charges.

The division took a $64 million writedown on the KC-46 military tanker, which is already two years behind schedule. Then there was a $691 million forward loss recorded for two military contracts Boeing won in September: a refueling drone for the U.S. Navy and a next-generation trainer jet for Air Force pilots.

The company says there’s a deliberate strategy behind bids such as its T-X offering, which was $10 billion below the Pentagon’s estimated costs. Boeing sees a chance to dominate a potential global market of 2,600 planes. Total sales associated with the two military aircraft could be valued at more than $60 billion.

“Think of these as investments in a production run that will begin in the early 2020s and run, potentially, for decades,” Muilenburg said on an earnings conference call Wednesday.

But to make the strategy pay off, Boeing will need to stick to deadlines and budgets -- areas where it’s struggled with military programs such as the much-delayed tanker.

Lockheed Rivalry

Muilenburg’s counterpart at Lockheed, Marillyn Hewson, spelled out the risks.

Matching Boeing would have meant absorbing $5 billion in losses, “an outcome that we do not feel would have been in the best interest of our stockholders or our customers,” she said during an earnings call Tuesday.

Bolstered by the cash spigot from its jetliner sales, Boeing is willing to take the long view.

“Boeing’s leveraging the fact that they’re generating a lot of cash from the commercial part of the business,” said Ken Herbert, an analyst with Canaccord Genuity. “That’s a clear advantage versus Lockheed Martin and Northrop Grumman.”

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