Post earnings, Boeing (NYSE:BA) shares dipped as much as 10.1% and reached a fresh 52-week low of $115.03. During the trading day, the stock recovered somewhat, but still ended the day 9%. Without looking at the earnings itself, I will be looking at the outlook, since it mostly sets the stock lower.
Figure 1: Boeing Corporate Logo (Source: Boeing website)
AeroAnalysis compiled the following table showing the difference between the guidance for 2015, the actual reported earnings and the guidance for 2016.
What can easily be seen is that the guidance is primarily lower, and that is also the reason for the stock tanking heavily during the trading day. Expected revenues are lower in both segments, while margins for the Commercial segment are expected to be unchanged, and margins for Defense, Space & Security unit are guided slightly higher.
The revenue and delivery guidance for the Commercial Airplanes segment means that the revenue per airframe goes from $86.7 million to $87.25 million, a 6% increase. This most probably is caused by the introduction of the MAX model and relatively higher Boeing 787 deliveries. So, the delivery mix itself will increase the company's revenue per aircraft. The 20 or so fewer forecasted deliveries are a result of lower Boeing 747 deliveries and 737 deliveries
The operating cash flow is expected to be slightly higher than in 2015. Since free cash flow mostly is about 70% of Boeing's operating cash flow, I expect a free cash flow of $7.0 billion in 2016.
Using the margins and revenues forecasts, I calculated core earnings of about $8.61-8.95 billion. In the worst case, this means earnings are 11% higher than in 2015 or 2.9% lower than in 2014. In the best-case scenario, which I feel comfortable with given Boeing's tendency on guiding conservative, earnings will be 10% higher than in 2014 and 15.6% higher than in 2015.
It is not the guidance that disappoints
It is not the guidance that disappointed, but the analyst expectations of $97.26 billion in revenues for 2016. Analysts did not expect a lower delivery, while that is common when a new aircraft such as the Boeing 737 MAX goes into production.
I calculated that the lower delivery target already accounts for $1.90 billion in revenue, leaving another $226 million. Analysts most probably aimed for higher deliveries in 2016 and slightly higher revenues in the Defense, Space & Security unit.
So, in fact, it is not the guidance that disappointed, but the expectation was simply too high.
I think the main question every investor should ask himself here is: "Is this guidance really that bad?"
I asked myself this question when I saw Boeing shares 9% lower today, and while the guidance was not what I was expecting, it is not that bad. Boeing's outlook offers a 16% earnings growth and higher operating cash flow. I do think that in the end, expectations for 2016 were too high, while there is no hike in the production rate planned for 2016 (The rate hike for the Boeing 787 already partly occurred in 2015).
While the lower revenue guidance was unexpected, I think a 9% drop is overdone. Boeing shares are a Buy at current prices, and the company offers long-term earnings growth.
Disclosure: I am/we are long BA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.