By Alwyn Scott
NEW YORK Jan 29 Conservative profit and
cash-flow forecasts spooked Boeing Co investors on
Wednesday, sending the stock down 5 percent and overshadowing
the company's strong fourth-quarter profit.
The aerospace and defense giant said core earnings, which
exclude some pension expenses, rose 29 percent to $1.84 billion,
or $1.88 a share, far exceeding forecasts as it delivered record
numbers of its 737, 777 and 787 aircraft and upped production
But Boeing was much more cautious about the current year. It
said core earnings would rise only about 2 percent and operating
cash flow would fall more than 20 percent.
Boeing said it still plans to return as much cash to
shareholders through share buybacks and dividends as promised.
But investors have been betting on cash flow building to a
substantial peak in coming years as Boeing churns out more
planes, which could provide more cash returns.
"Now, everyone is having to recalibrate where's the summit,"
Ken Herbert, an analyst at research firm Canaccord Genuity Inc,
said of the forecast. "There's a shift in sentiment here."
Boeing typically sets low targets at the start of the year
and increases them as the months pass, so analysts said the news
was not a game changer that would alter forecasts.
The company's defense business also grew more profitable in
the latest quarter, thanks to earlier cost cutting, providing a
Still, with the stock up more than 80 percent in 2013,
investors reacted to the low forecasts by selling.
Shares in the Chicago-based company were down 5.7 percent at
$129.31 in afternoon trading on the New York Stock Exchange.
Robert Stallard, analyst at RBC Capital Markets, said the
stock's decline reflected "initial sticker shock" at the
numbers, particularly cash flow. But if Boeing follows past
practice, it will easily exceed those numbers.
A year ago, Boeing forecast full-year 2013 profit of up to
$6.30 a share. By the end of the third quarter, the forecast had
climbed as high as $6.65 a share. The actual figure topped that
handily, at $7.07.
For 2014, analysts expect Boeing's core earnings to reach
$7.57 a share, according to Thomson Reuters I/B/E/S. That would
be an increase of about 7 percent.
The cash flow outlook was more troubling, since it directly
affects investor returns through dividends and share
Boeing forecast a 24 percent drop in operating cash flow
after pension expenses in 2014, to about $6.25 billion.
That was a big jump from the forecast of a 13 percent drop a
year ago, to about $6.5 billion.
Analysts had been increasingly optimistic and wide-ranging
in estimates of the cash mountain, meaning there wasn't a clear
consensus, Stallard said.
The latest forecast appeared to have grounded expectations a
The cash forecast raised other questions, too: Might it
reflect changes in plans for plane production or in Boeing's
ability to cut the cost of making the cash-burning 787
Boeing Chief Financial Officer Greg Smith said there were no
such changes. Boeing plans to deliver between 715 and 725
commercial airplanes this year, an increase of up to 12 percent
from a record 648 in 2013.
He also said Boeing would use more than the targeted 85
percent of free cash flow to buy back shares and pay dividends,
ensuring that those programs remain on track.
As if to counteract the commercial airplane jitters,
Boeing's defense unit performed surprisingly well in the
quarter. It posted wider profit margins, even as margins in the
commercial airplane business narrowed.
The defense business had been under pressure from declining
U.S. defense spending, and last summer Chief Executive Jim
McNerney said the company was not out of the woods in facing
earnings effects from automatic budget cuts known as
sequestration. "We are entering the woods," he said.
On Wednesday, McNerney said the recent U.S. budget agreement
had bought an 18- to 24-month reprieve from drastic defense
spending cuts but still posed a grave risk.
"We remain very concerned about longer-term U.S. budget
uncertainty" and a potentially "devastating impact" of defense
budget cuts on the U.S. industrial base, McNerney said in a
Defense margins widened to 10.8 percent in the fourth
quarter from 8.4 percent in the third quarter.
Defense companies had planned for the worst with budget cuts
and have reduced their costs in anticipation, Stallard said. But
the budget impact was not as bad as expected, "so across the
defense sector you're seeing pretty decent margins."
Margins for commercial airplanes, meanwhile, shrank to 10.3
percent in the fourth quarter from 11.6 percent in the third
quarter. But for the full year, commercial margins of 10.9
percent easily topped the forecast of greater than 10 percent,
Boeing's latest results included a non-cash charge of $406
million to settle litigation over the canceled A-12 stealth
The U.S. Justice Department announced a settlement with
Boeing and General Dynamics Corp last week that includes
three additional EA-18G fighter jets, which will be paid for by
Boeing. [ID: nL2N0L309C]
Boeing said its earnings reflect a charge of 34 cents a
share for the A-12 settlement, which was partly reduced by a
28-cent-per-share gain from a favorable change in tax
The tax benefit pushed the company's effective tax rate down
to 14 percent. Net income in the quarter rose to $1.23 billion,
or $1.61 a share, from $978 million, or $1.28 a share, a year
Boeing's quarterly core net income of $1.88 a share compared
with $1.46 a share a year earlier. Revenue rose to $23.8 billion
from $22.3 billion in the quarter. Analysts had expected core
earnings per share of $1.57 for the fourth quarter, and revenue
of $22.7 billion, according to Thomson Reuters I/B/E/S.
McNerney said he was not planning to retire, although former
defense chief Dennis Muilenburg was now helping oversee the
entire business following his promotion to chief operating
officer in December, one of several management shifts.
"While you may be seeing more of them," McNerney said, "it
doesn't mean you will be seeing less of me."