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Boeing Earnings Soar 52%, but BA Stock Falls

Commercial aircraft sales soar, but significant challenges remain

Boeing (BA) shareholders got some good news on Wednesday morning as BA rocked its second-quarter financials, driven by strong commercial airplane deliveries and growing margins. But despite Boeing’s earnings beat and higher full-year guidance, the aerospace giant still must fly through pockets of turbulence en route to its next summit.

boeing stock earnings

Let’s start with the facts: Boeing’s earnings per share (EPS) were $2.42 in the fiscal second quarter — up a whopping 52% from the same quarter last year and beating Wall Street’s expectations by 41 cents per share. BA reported $22.05 billion in revenue — 1% higher than the year-ago quarter but missing analysts’ expectations of $22.33 billion.

Not surprisingly, Boeing earnings got a lot of lift from ramped-up commercial aircraft deliveries, particularly the 787 Dreamliner. Perhaps even better news: Boeing raised its full FY15 guidance to $7.90-$8.10 per share — up substantilly from earlier forecasts of $7.15-$7.35 per share.

Boeing stock defied gravity in 2013 as investors shrugged off the 787 Dreamliner’s teething troubles and production delays, but the stock is down about 7% year-to-date and declined nearly 3% on Wednesday morning. Does that mean now is the time to buy BA stock? Here are three tailwinds and three headwinds for the company:

Tailwind: Strong Aircraft Production, New Orders

Boeing earnings were helped out a lot by strong commercial aircraft deliveries and production — particularly the company’s flagship 787 Dreamliner. BA has increased production rates on the once troubled aircraft, and even delivered its first stretch 787-9 during the quarter. The FAA certified the Dreamliner for Extended-range Twin-engine Operations (ETOPs) over water, allowing the Dreamliner to fly routes 330 minutes away from an emergency airport — a must-have for airlines in Asia and Australia. BA also penned 264 net orders during the quarter.

Tailwind: Commercial Airplane Demand is Skyrocketing

Over the next two decades, Boeing forecasts global demand for 36,770 new commercial aircraft — that’s 4.2% higher than the company estimated at this time last year. If Boeing’s current market outlook is correct, the value of new airplanes sold over that period will reach a whopping $5.2 trillion. Much of the focus in recent years has been BA’s battle with European rival Airbus (EADSY) in wide-body and mini-jumbo jets like Boeing’s 787 Dreamliner and upcoming 777X. But the lion’s share of new aircraft sales will be in fuel-efficient, 160-seat jets like Boeing’s Next Generation 737-800 and 737 Max which are head-to-head competitors with Airbus’ A320neo. These single-aisle jets are well suited for low-cost carriers — one big reason BA believes 25,680 new jets will be needed in this market by 2034.

Tailwind: International Deals Boost Defense Sales

The Pentagon may be in belt-tightening mode but that doesn’t mean gloom and doom for BA’s defense business. In the past, international sales accounted for only about 15% of BA’s defense unit’s backlog; these days, that figure is 30% to 35%. In recent weeks, BA has announced a wide range of deals, including a partnership with Head Italia for sophisticated cybersecurity solutions to Italian government and defense customers. U.S. military sales will continue to contribute to Boing’s bottom line — particularly given last month’s successful test of its Ground-Based Midcourse Defense (GMD) ballistic missile defense system.

That’s the good news. But on the other hand…

Headwind: Challenges For KC-46 Tanker Program

Boeing’s KC-46 Pegasus tanker, a 767-based aircraft that will replace the U.S. Air Force’s 400 KC-135s, has had some teething troubles in development and reportedly is some $1.1 billion over budget, according to the Air Force Times. Boeing must eat some of those costs, and it faces the risk of losing the balance of the $52 billion deal if it can’t deliver the first 18 aircraft of the 179-plane total to the Air Force by August 2017. BA took a $272 million after-tax charge in the second quarter to cover increased engineering and integration work on the Pegasus.

Headwind: Airbus A330neo Launch Was Big

Measured only by the numbers, European rival Airbus took top honors at last week’s Farnborough Air Show, inking deals for 496 aircraft valued at $75.3 billion, compared to BA’s 201 planes valued at $40.2 billion. The A330neo, which officially debuted at Farnborough with 121 orders valued at $33.2 billion, is EADSY’s answer to the compelling demand growth for single-aisle aircraft.

Headwind: SpaceX Could Beat Out Boeing/Lockheed Martin Team on Rocket Deal:

Just as BA’s Defense and Space Systems unit was celebrating the first year of an $11 billion contract with the U.S. Air Force, leave it to Elon Musk to shake up the status quo. United Launch Alliance (ULA) — a joint venture of Boeing and Lockheed Martin (LMT) that was preparing to sell 36 rockets to the Air Force military and intelligence satellite launches — was sued by SpaceX and Tesla (TSLA) founder Elon Musk. Musk has argued that the contract was not put out for competitive bid by the Air Force in 2012 since ULA was the only certified bidder. Because SpaceX launches are far cheaper than ULA’s and the latter’s use of some Russian rockets could be a violation of the appropriation rules, members of the Senate Armed Services Committee may be considering dumping ULA from the contract altogether, according to a Forbes report.

Bottom Line

BA stock opened Wednesday down nearly 3% despite the strong Boeing earnings report. Boeing stock has been at a high altitude since the beginning of 2013, riding a tidal wave of new orders and increased production, particularly of the 787 Dreamliner. BA stock has an attractive current dividend yield of 2.2%, but trading at 15 times forward earnings, it looks overvalued now and is overdue for a breather.

Although the pullback in BA stock might provide a good entry point, keep a close eye on the production and delivery rates on existing aircraft like the 787 and progress on new programs like the 777X. Commercial sales softened the blow of the KC-46 costs, but any missteps in that program over the next couple of quarters could stall Boeing stock. If Elon Musk’s SpaceX prevails in its bid to overturn ULA’s rocket contract, that would be a sure sign to sell BA stock.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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