Boeing (NYSE:BA) reported a solid set of second quarter results on Wednesday before the market open.
The company hiked its full year earnings outlook after issuing a "conservative" outlook at the release of its first quarter results. The hike in the guidance is partially aided by tax benefits, which were partially offset by higher Tanker program costs. The remainder of the hike can be attributed thanks to a solid performance as well as the conservative guidance earlier this year.
While the backlog is very appealing, the key is to transform orders into sales. Given the high valuation, I am cautious as Boeing seems to have troubles increasing production and sales. I am a buyer on a 5-10% pullback however thanks to the appealing dividend, strong balance sheet and large backlog.
Second Quarter Headlines
Boeing posted second quarter sales of $22.04 billion up a percent compared to last year. Despite the modest increase in sales, revenues came in lower than consensus estimates at $22.32 billion.
Reported net earnings on a GAAP basis rose by 52% to $1.65 billion, while earnings per share were up by 59% to $2.24 per share.
On a non-GAAP basis, earnings came in at $2.42 per share, ahead of consensus estimates at $1.98 per share.
Note that a whole list of one-time items impacted results this quarter. The company took a $272 million after-tax charge related to work on the KC-46A Tanker program. This was offset by two tax benefits totaling $524 million on an after-tax basis.
Looking Into The Performance
As usual, it is the commercial business of Boeing, which is driving growth with revenues being up 5% to $14.31 billion driven by a 7% increase in deliveries to 181 planes. This results in an average price per plane of $79 million.
Earnings rose by 7% to $1.55 billion as operating margins improved by 10 basis points to 10.8% of sales. The unit booked net orders of 264 planes, resulting in a book-to-bill ratio of 1.46 times based upon plane numbers. This means that the backlog continued to grow, now containing 5,200 planes for a total value of $377 billion.
Total defense, space and security sales were down by 5% to $7.75 billion driven by single digit revenue declines in each of the three subdivisions. Earnings from military aircraft plunged by 57% towards $165 million due to a $187 million pre-tax charge on the KC-46A Tanker program. Despite lower sales at network & space as well as global services and support, both units managed to boost earnings.
Total reported operating earnings from the entire defense, space and security business were down by a quarter to $582 million. As such operating margins compressed by a full two percentage points to 7.5% of sales, of course driven by the one-time charges.
Updating The Full Year Outlook
For this year, Boeing continues to anticipate sales of $87.5 to $90.5 billion. Core earnings per share are seen between $7.90 and $8.10 per share, while GAAP earnings are seen at $6.85-$7.05 per share.
The core earnings guidance implies a $0.75 per share hike from the previous guidance of $7.15-$7.35 per share. Note that the net sum of tax benefits and the charges on the Tanker program aided earnings by thirty-three cents, while the remainder of the upgrade is driven by a strong operational performance.
Commercial revenues are seen between $57.5 and $59.5 billion combined with operating margins exceeding 10%. Total BDS sales are seen between $30 and $31 billion combined with operating margins of around 9.5%.
Valuing The Business
Ending the quarter with 747 million shares outstanding, equity in Boeing is valued at $96 billion assuming a share price of $129 per share. This implies that operating assets are valued at $93-$94 billion given the firm's $11.3 billion in cash and equivalents and the $8.9 billion total debt position.
This values operating assets at nearly 1.0 times annual revenues, 16 times core earnings and 18-19 times annual earnings.
This valuation is accompanied by a solid 2.3% dividend yield as Boeing pays a quarterly dividend of $0.73 per share to its investors.
Looking At The Past, To See The Future
Over the past decade, Boeing has continued to show solid revenue growth amidst the increase in global demand for air travel. Between 2004 and 2014, Boeing is set to increase its annual revenues by some 70% on a cumulative basis.
In the meantime, Boeing managed to steadily increase its margins while it has also retired roughly 10% of its shares outstanding. All of this happened as Boeing has improved its balance sheet. Back a decade ago, Boeing held a net debt position of close to $10 billion while currently it holds a modest net cash position.
Given the continued projected growth, and very full commercial backlog the future continues to look good for the plane manufacturer.
Of all the planes delivered, Boeing managed to deliver some 30 787s during the quarter, assuming a total of 62 deliveries in the second half of this year. The ramp-up in the Dreamliner is very important as total revenues are hardly increasing this quarter on a year-over-year basis due to the continued weakness in the space, defense and security business.
Back in June, I last took a look at Boeing's prospects. Shares traded at current levels around the time as shares were plagued by a downgrade, profit warnings from European airline carriers and a big order cancellation for competitor Airbus. Nothing fundamentally has changed ever since, and the second quarter earnings report did not reveal any major news.
I concluded that I would be a buyer at $120-$125 if the company would re-test the lows of earlier this year, provided that the general market held up relatively well. Today I reiterate that stance.
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