Boeing's `Monster' Cash Haul Gives New Boost to Top Stock on Dow

(Bloomberg) -- If cash is king for investors, then Boeing Co. emerged as industrial royalty Wednesday with an earnings report that sent its shares skyrocketing.

Boeing’s free cash flow surged to $4.51 billion in the second quarter as the manufacturer squeezed costs out of its 787 Dreamliner jet program. That was more than double the tally analysts had expected -- and Boeing channeled $3.4 billion of the haul to stock buybacks and dividends. The Chicago-based planemaker also announced plans to bolster its pension funding with company shares, and reported profit that beat estimates.

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.

“In the rarefied world of mega-cap industrials, cash is the go-to metric for investors, and based on this metric Boeing remains the standout performer,” said Robert Stallard, an analyst at Vertical Research Partners, after earlier hailing Boeing’s “monster” cash generation. “With basically no fears over the aerospace cycle at this juncture, we can understand why the stock continues to be unstoppable.”

The shares jumped 9.9 percent to $233.45 at the close of trading in New York, the largest gain since October 2008. The stock has soared 50 percent this year, five times the Dow’s advance, as the manufacturer’s record stockpile of airplane orders offers investors an assuring glimpse of future sales and cash.

Still, a drop in jetliner deliveries that dragged second-quarter revenue below estimates provided reminders of the risks for Boeing as it refreshes its commercial lineup and struggles to get a delay-plagued aerial tanker on track. Boeing delivered 183 jetliners in the quarter, 16 fewer than a year ago. The tally included seven fewer 777s, the second-largest source of profit, as work starts on the first upgraded 777X.

‘Potential Risks’

“Boeing and the aerospace industry has not covered itself in glory when it comes to delivering new programs on time and on budget, and our sense is that the current tsunami of cash has allowed investors to become complacent over these potential risks,” Stallard said.

Boeing is poised to continue generating a cash gush as it speeds work in its factories to capitalize on record sales for the single-aisle 737, the company’s largest source of earnings. That’s assuming 737 Max deliveries roll smoothly after early engine-related delays. Falling manufacturing costs for the newly profitable 787 jetliner are another source of strength.

The balance of inventory and factory costs for the Dreamliner fell $531 million to $26.5 billion during the second quarter. Advance payments from customers added another $1.7 billion to cash from a year earlier, Ron Epstein, analyst with Bank of America Corp., said in a note to clients.

Boeing 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 the 787-9 and -10 variants and no longer has to compensate airlines for late deliveries.

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.

Pension Contribution

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.

“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.

Buyback Spree

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. That’s about 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, while the 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.

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, Bruce Rule