Boeing Co (BA) Stock Takes a Seat to Higher Profits

The March 27 announcement by Adient PLC (NYSE:ADNT) that it was collaborating with Boeing Co (NYSE:BA) to create better, more functional aircraft seating for its airplanes had a positive effect on Boeing stock, sending it up $1.26 in next-day trading.

Boeing Co (BA) Stock Takes a Seat to Higher Profits

But is it enough to keep Boeing stock moving higher?

After all, Boeing is already up 14% through the end of March. If today were the last day of 2017, Boeing’s annual total return for the year would be higher than its three previous years.

Boeing stock continues to go higher despite revenue going lower; that’s not something that can carry on for very long unless arrangements such as the one with Adient, the former car seat division of Johnson Controls International Plc (NYSE:JCI), delivers substantial reductions in manufacturing costs.

The Impact of the Agreement on Boeing Stock

While the financial benefits for Boeing are yet to be determined, it’s very clear why Adient is interested in working with the airplane manufacturer.

According to Counterpoint Market Research, the aircraft interiors market is projected to grow to $21.7 billion by 2025. Meanwhile, growth in U.S. auto sales is slowing to the lowest annual year-over-year increase since the 2008 financial crisis.

“Through discussions with Boeing, we believe there’s an opportunity for Adient to raise the bar on the aviation passenger experience, building on our leadership in the automobile seat market.” said Adient Chairman and CEO Bruce McDonald.

When one door closes, another one opens. The vice president of Boeing Commercial Airplanes, Kent Fisher, had this to say in the press release:

“Boeing is building commercial airplanes at record rates to deliver on an order backlog of more than $400 billion. We continually explore opportunities to offer more value to our customers and believe they would benefit from a wider range of options and more reliable, on-time performance in the airplane interiors and seating category.”

The problem for Boeing isn’t the $400 billion backlog of orders it has on its plate or the desire to build better more functional seating — it’s that most of the orders are for its 737 class of planes which come with a cheaper price tag and lower profitability.

So while Boeing will deliver as many as 765 planes this year, more than it delivered in 2016, it will come at the expense of top-line revenue. In 2016, Boeing generated $94.6 billion in sales; it expects between $90.5 billion and $92.5 billion in revenue in 2017, a year-over-year decline of up to 4.3%. That’s on top of a 2% decline in 2016.

In terms of non-GAAP core earnings, Boeing expects as much as $9.10 per share, significantly higher than the $7.25 per share it produced in 2016. Operating cash flow is expected to grow by $250 million to $10.75 billion with free cash flow increasing 7.2% to $8.5 billion.

Clearly, Boeing expects to cut costs in 2017.

“Looking forward, our team is intent on accelerating productivity and program execution to deliver increasing cash and profitability from our large and diverse order backlog,” said Boeing CEO Dennis Muilenburg in its Q4 2016 earnings release.

Furthermore, Boeing announced March 27 that it’s raising the list price of every one of its planes in order to recover higher manufacturing costs including labor. By hook or by crook, Boeing is going to deliver on its profitability goals for 2017 and beyond.

I think this partnership is a good move for both companies and while the benefits to Adient are more readily apparent, Boeing wouldn’t be doing this if it didn’t think it could help streamline the manufacturing process so that planes are built faster and better than they were before the arrangement.

As I said at the end of February, I see the glass half-full when it comes to Boeing stock. This certainly cements those thoughts.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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