Published January 31, 2018 in The Everett Herald
Bloomberg News and Associated Press
The Boeing Co.’s stock price jumped to an all-time high Wednesday as the company reported higher earnings in the fourth quarter of 2017 on surging deliveries of the 737 and an unexpectedly large one-time gain from U.S. tax cuts.
The world’s largest aerospace company is extending a remarkable stock rally as it benefits from strong jetliner demand and plans to ramp up output of the 737, its largest source of profit. Meanwhile, the U.S. corporate tax cuts are taking effect just as the 787 Dreamliner starts to generate hefty cash gains after a decade of losses.
The company’s stock has more than doubled since the start of 2017. Chicago-based Boeing has surpassed General Electric to become the largest U.S. industrial company by market value. Its stock price had advanced 15 percent this year alone through Tuesday, the largest gain among the 30 members of the Dow Jones Industrial Average.
Shares closed Wednesday at $354.37, up 4.93 percent — near an all-time high of $360.97, reached earlier in the trading day.
“It’s a very visible, must-own stock right now,” said Carter Copeland, an analyst at Melius Research, who added that strong numbers across the board will probably entice more investors.
Driving the bullish outlook was the announcement of results for the fourth quarter of 2017 and the full year. The company pocketed a tax boost of $1.74 a share in the quarter and expects more benefits to come this year.
Lower taxes are combining with record jetliner deliveries to fuel the cash gush at Boeing. In an earnings report, the company predicted the first annual sales growth since 2015 and said operating cash flow, a focus for investors, would climb to $15 billion.
Boeing delivered a record 763 airliners in 2017 and predicts that will rise to between 810 and 815 planes this year. It has a backlog of more than 5,800 planes valued at $488 billion, although that figure is based on list prices, and airlines usually get big discounts.
While the company is racing to take advantage of the hot market — speeding production of the workhorse 737, built in Renton, and the 787 Dreamliner, built in Everett and North Charleston, South Carolina — Boeing also is looking for new sources of growth.
Boeing has been talking to Embraer of Brazil about a merger for weeks. Embraer’s lineup of E-jets would help Boeing counter Airbus’ new majority stake in the C Series of planes made by Bombardier of Canada. C Series planes have between 100 and 150 seats and also compete with small airliners from China. Brazil’s government, however, has raised concerns about a foreign takeover of Embraer.
During a conference call with analysts and journalists Wednesday, Boeing CEO Dennis Muilenburg said merger discussions have been “productive” but that Boeing’s growth strategy doesn’t depend on closing the deal.
Meantime, earlier in January Boeing announced it would team with auto-seat maker Adient to make seats for new and retrofitted airplanes, a market that is $4.5 billion and growing. At times, Boeing has been plagued by delays in deliveries from seat suppliers. Muilenburg said the company plans to use a mix of seats from the Adient joint venture and outside suppliers.
And Boeing continues to ponder another major undertaking — whether to design and build from scratch a new plane to fill the market gap between the popular 737 and larger two-aisle planes, the 777 and 787.
Muilenburg said Boeing is talking to 50 customers and won’t be rushed into a decision, which is expected this year. Boeing’s last new plane, the 787, was completed behind schedule and over budget but now attracts solid orders. Under Muilenburg, Boeing has rolled out new planes such as the 737 Max and 787-10 with few glitches, while rival Airbus has battled engine delays for its A320neo and A330neo. And Muilenburg’s campaign to make Boeing leaner has lowered the cost of goods and services.
Although it has racked up a string of victories, Boeing suffered a defeat last week when a U.S. trade panel rejected the company’s charge that it had been harmed by Bombardier. Boeing said the Canadian company was selling C Series jets at below cost.
Not only did Boeing lose the trade case, it drove Bombardier into the deal with Airbus, strengthening Boeing’s chief rival. Muilenberg said Boeing was waiting to learn details of the trade panel’s decision before deciding on its next move.
Adjusted fourth-quarter earnings were $4.80 a share, Boeing said, or $3.06 a share excluding the tax gain. Analysts had predicted $2.90 a share, according to the average of estimates compiled by Bloomberg. Revenue rose 8.9 percent to $25.4 billion, compared with the $24.7 billion analysts expected.
Revenue has declined since 2015 as Boeing slowed deliveries of the highly profitable 777 jetliners amid waning sales and a shift to a new model, the 777X. But earnings per share have continued to rise as stock buybacks contributed to a 15 percent drop in the company’s average share count.
For the manufacturer of the carbon-fiber 787 Dreamliner — a source of Boeing’s cash riches — the timing of new corporate tax cuts “could not have been much better,” said Douglas Harned, aerospace analyst with Sanford C. Bernstein & Co.
Boeing was able to claim deductions at the old 35 percent rate over the years it recorded cash losses on the Dreamliner. The aircraft wracked up almost $30 billion in production and inventory costs as Boeing worked out supplier snarls and compensated airlines for tardy deliveries. The company said it expects to be taxed at a 16 percent rate in 2018.
Muilenburg has set a target of double-digit profit margins for Boeing’s three main divisions by the end of the decade.
Quarterly revenue for the commercial airplane unit increased 7.5 percent to $15.5 billion as Boeing delivered a record 209 commercial aircraft including 148 of its 737, a workhorse for low-cost carriers. The operating margin was 11.5 percent compared with 8.3 percent a year earlier.
Boeing’s defense division sales rose 4.8 percent to $5.54 billion, while its 10 percent operating margin improved very slightly from a year earlier.
Sales for company’s global-services division, formed in mid-2016, climbed 17 percent to $4 billion while its operating margin of 15.4 percent fell more than a percentage point.
Investors have puzzled over the division, created last year from a hodge-podge of existing businesses providing spare parts, maintenance and consulting services. Muilenburg has touted it as a source of growth and profit, setting a $50 billion sales target over the next five to 10 years.
“The market doesn’t understand what that business is yet,” said Copeland, the analyst with Melius Research.
With reports by Julie Johnsson of Bloomberg News and David Koenig of The Associated Press.