Boeing: About To Crash And Burn?

| About: The Boeing (BA)

Summary

Some of my most respected colleagues insist to me that Boeing stock is going to take a nose dive.

Boeing just reported its second quarter which posted a huge loss, but I discuss the results.

Operationally the company remains strong.

You may recall I wrote about my decision to buy The Boeing Company (NYSE:BA) and got in back in December. This was as the company raised its dividend and expanded its buyback but now 7 months later, where do we stand? Well the stock is up, which is good, but we need to consider where the stock is going. Is it going to crash and burn? Some of my most respected colleagues insist to me that it will. Even pointing to this mornings' results as evidence, or declining revenues, cuts to military spending, etc. To have an understanding of where it is going, we have to review the company's performance but also discuss where the company is heading.

Boeing just reported its second quarter. Do not fear, but the company had a big loss in the quarter. However this loss was more than anticipated thanks to certain charges. Analysts were all over it, and their consensus was crushed. The numbers beat estimates on the top line handily but missed on the bottom line. The company reported revenue of $24.8 billion in the quarter, surpassing estimates by $760 million and rising 1.1% year over year. Core earnings per share for the quarter were pitiful year over year compared to $1.62 last year. But this was a beat of $0.48 against analyst estimates. Why the loss? Remember the company took a charge for its 787 reclassification and took charges in the 747 program as well as the KC-46 tanker program. These charges combined for a hit of $3.23 per share. However, the company was operationally strong.

To address this, let's take a look at some of the sector highlights to get a feel for the performance. The Commercial Airplanes segment saw second quarter revenue rise 3% to $17.4 billion on higher delivery volume, while operating margin was -5.6%, reflecting aforementioned charges. During the quarter the 787 program hit deliveries of 12 planes per month while the 737 MAX saw the first two airplanes completed. In total, the 737 program has won nearly 3,200 firm orders for the 737 MAX since launch. Commercial Airplanes booked 152 net orders during the quarter. Backlog remains strong with nearly 5,700 airplanes valued at $417 billion.

In the company's Defense, Space & Security segment, revenue was a strong $7.2 billion with an operating margin of 8.3%. This was down from over 10% last quarter reflecting aforementioned charges, but I have to point out these margins were still up year-over-year compared to the 7.2% in Q2 2015, Boeing Military Aircraft revenues were down, with second-quarter revenue increasing to $3.0 billion primarily as a result of planned reductions in C-17 and Chinook deliveries. The company saw some strong contracts in the quarter as well. The Network & Space Systems division saw revenue of $1.8 billion and its operating margin was 8.5%. The Global Services & Support Division saw revenue increase to $2.4 billion due to higher volume in Aircraft Modernization and Sustainment. Further, its operating margin increased to 11.1% on strong performance. Like with the Commercial Airplanes segment, there is a significant backlog. Backlog in this segment was $55 billion, of which 37% represents orders from international customers. Commenting on the quarter Boeing President and Chief Executive Officer Dennis Muilenburg stated:

"The underlying operating performance of the company remains solid with our commercial and defense teams again delivering strong revenues and operating cash flow. Actions taken during the quarter that impacted our 2 earnings were the right, proactive steps to reduce risk and strengthen our position for the future. Our strong cash generation also supported our ongoing commitment to invest in product innovation and in our people, and return substantial cash to shareholders through stock repurchases and dividends. As we look forward to the second half of the year, we anticipate continued strong operating performance across our production and services programs on generally healthy demand for our broad portfolio of market-leading offerings. Our commercial airplane development programs remain on track and we have successfully completed the flight testing required for customer approval of key KC-46 production milestones. Overall our teams remain intensely focused on improving productivity and quality, building out our large and diverse backlog, investing in future growth, and delivering increasing value to all of our stakeholders."

I thought the performance this quarter was operationally very strong despite the large losses associated with the charges taken in the quarter. Looking ahead Revenue guidance is between $93 and $95 billion, including commercial deliveries of between 740 and 745 total Due to the charges taken, earnings have been revised much lower. Core earnings per share guidance for 2016 is seen coming in at $6.40 to $6.60, down from $8.15 to $8.35. I will point out that Boeing revises guidance throughout the year and this is subject to change. The outlook isn't poor, but reflects the nature of the business. What we care about is the long-term and that's where I am focused. At current price levels I am holding. I would look to add on under $125 should a large pullback occur.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

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.