Look for fourth-quarter earnings from Boeing (BA), 2013’s aerospace superstar, to still be on the rise when Boeing reports Wednesday morning. Still, Boeing stock holders would be well served to remember that timeless investment adage: “Past performance is no guarantee of future results.”
But first the good news: Boeing earnings for Q4 should mark a strong finish for the company’s impressive fiscal year. In fact, the smart money is expecting an earnings boost of better than 20% and even a slim rise in revenue — not at all bad in a year that saw defense cuts, sequestration and ongoing “teething troubles” with Boeing’s flagship 787 Dreamliner. Boeing stock is trading near historic highs, and that’s thanks in part because outstanding performance in its commercial airplanes unit has more than offset weaker defense spending.
One of Boeing’s most vaunted accomplishments in the quarter was securing more than $100 billion in orders at the Dubai Air Show — more than double the orders secured by rival Airbus (EADSY) at the critically important industry event. Boeing officially launched its new, composite-wing 777X at the show with 242 orders and commitments.
Order backlogs are growing and profits — particularly in the commercial airplanes business — are skyrocketing. Consider that BA’s commercial planes unit reported a margin of nearly 12% in the third quarter — blowing away even the company’s own guidance.
But just as subtle disruptions in the slipstream can cause an airplane to lose lift and stall, Boeing stock investors should keep an eye out for early warnings of turbulence ahead. Here are three storm clouds on the horizon that could be lurking behind Boeing earnings:
#1: Airbus Still Won the Year
Boeing Commercial Airplanes had a great year in 2013, winning 1,355 net commercial aircraft orders after cancellations. Unfortunately for BA, Airbus did even better, ending the year with 1,503. Expect this slugfest to go into extra rounds this year as the two commercial jet manufacturers vie for supremacy among global airline customers.
#2: Boeing’s Perceived Reliability is Taking it on the Chin
The 787 Dreamliner’s “teething troubles” have begun to wear thin on airline customers, particularly in the wake of yet another battery-related problem earlier this month. The main battery on a JAL 787, which was being readied for takeoff, overheated on Jan. 14 and was discovered when a mechanic spotted smoke coming from the fuselage. The event, coming a year after lithium-ion batteries overheated in 787 Dreamliners operated by Japan Air Lines and All Nippon Airways led to a four-month grounding of the jets worldwide, is under investigation.
Airline customers, most notably Norwegian Air Shuttle, have complained about the jet’s reliability, which even BA admits is only 98%. That likely entered into Lion Air’s decision on Monday to cancel five 787 Dreamliners on order.
Perception is a huge deal when it comes to commercial aviation, and billion-dollar orders can take a near-term hit from bad news. That’s one reason the Federal Aviation Administration’s order that U.S. airlines inspect Boeing 767 jets for problems that could cause a loss of control is unwelcome news to BA stock holders three days before its earnings call.
#3: Delivery Targets Could Be Hard to Meet
The good news about the 787 Dreamliner: Boeing has ramped up production in its South Carolina plant and is delivering a record-high 10 planes a month. The bad news: It took time to iron out the kinks with the new facility. Boeing recently hired 300 additional mechanics to ensure that the planes could be delivered on time and ship shape. That substantially raises the ante on 777X, which can ill afford any of the delays that plagued the Dreamliner — particularly since Airbus’ A350 stole the Paris Air Show back in June.
While Boeing prevailed in a contract vote with the International Association of Machinists and Aerospace Workers union earlier this month that will keep production of the next-generation 777X in Washington state, BA likely will build a new manufacturing facility for the plane’s composite wing. New plants are never plug-and-play solutions, and Boeing might be hard-pressed to execute well enough to meet the plane’s 2020 target date.
Bottom Line: Take Profits on Boeing Stock
Boeing earnings should make shareholders happy Wednesday, but there’s more to this story than meets the eye. Boeing stock has been bulletproof this past year, gaining 85% in just 52 weeks.
But the air is terribly thin at this altitude, and sooner or later, gravity is going to kick in — particularly as competition from Airbus heats up and the demands of aggressive production scheduled for the next generation 777X and 737 Max jets ramp up.
If you’re in BA stock now, it might be a good time to take at least some profits.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.