Boeing falls as forecast boost fails to ease 787 cost concerns

Chicago-based Boeing Co. fell the most on the Dow Jones Industrial Average as investors signaled concern that the world's largest planemaker isn't moving fast enough to curb costs on the 787 Dreamliner.

While Boeing boosted its earnings forecast for 2014 by 20 cents a share today and beat third-quarter profit estimates, the results were overshadowed by the expense tied to making the 787, the carbon-fiber jet on which the company still loses money. Per-share profit growth also was buoyed by expanding margins in the defense business, which is dwarfed by the commercial unit.

“The EPS beat was defense driven and not all of the news was encouraging,” Joseph Nadol, a JPMorgan Chase & Co. analyst in New York, told clients in a note. “There was a drop-off in the core commercial margin and 787 cash losses did not slow as fast as we had forecast.”

Boeing slid 3.6 percent to $122.61 at 1 p.m. in New York, the biggest drop among the 30 Dow stocks. The shares retreated from a gain in early trading after the Chicago-based company disclosed the 787's deferred production cost separately from the quarterly earnings release.

The expense is an accounting measure that is supposed to drop as a projected gain in efficiency reduces assembly costs on the plane, which entered service in 2011 more than three years late. Instead, that gauge rose 3.9 percent to $25.2 billion from the previous quarter, Boeing said. Last year, Boeing estimated a ceiling for the deferred production cost of about $25 billion, up from $20 billion.

Free cash flow fell 86 percent to $317 million, Boeing said, citing a drag from pension expense and advance payments to Dreamliner suppliers. Chief Financial Officer Greg Smith said the 787 will be “cash positive” in 2015.

“The only slight increase in the cash-flow outlook coupled with 787 deferred production topping $25 billion will increase the bear calls for higher 787 costs and lower cash-flow estimates,” Peter Arment, a Sterne Agee & Leach Inc. analyst in New York, wrote in a note to investors.

Arment rates Boeing as buy, the equivalent of Nadol's overweight.

Boeing is benefiting from orders outpacing analysts' estimates and record output of its top-selling 737 jet. Earnings for 2014 excluding some pension expense will be $8.10 to $8.30 a share, Boeing said today, topping July's projection of $7.90 to $8.10. Analysts had projected full-year profit of $8.29 a share, according to data compiled by Bloomberg.

Quarterly profit of $2.14 a share exceeded the $1.97 average estimate of 20 analysts surveyed by Bloomberg. Sales rose 7 percent to $23.8 billion, exceeding analysts' average estimate of $23 billion.

Boeing won 1,000 net aircraft orders through September, “exceeding what we believed the figure would be for the full year,” Stephen Levenson, a Stifel Financial Corp. analyst in New York, wrote yesterday in a note. “Orders are likely to decline next year, but we think backlog is unlikely to change materially.”

Commercial-aircraft deliveries totaled 186 in the quarter, pushing the year-to-date total to 528. The company has said it expected to hand over 715 to 725 aircraft in 2014, including 110 Dreamliners.

The narrow-body 737 accounted for 120 deliveries last quarter, up from 112 a year earlier, after Boeing raised monthly output to 42 from 37.

Commercial Revenue

Revenue at Boeing Commercial Airplanes rose 15 percent to $16.1 billion, Boeing said. That segment has taken on a greater share of sales as the second-largest U.S. defense contractor feels the sting of Pentagon budget cuts. Boeing's backlog of more than 5,500 jetliners is valued at a record $430 billion, compared with a $60 billion defense backlog, the company said.

Cost-cutting efforts have bolstered margins at the defense, space and security business. Profit for the defense unit rose 27 percent to $856 million even as sales fell 2 percent, Boeing said. Operating margins rose 2.4 percentage points to 10.8 percent.

The company stands to reap a cash bonanza from an order backlog of civilian jets sufficient to keep its factories humming for at least seven years, depending on the model, according to Bloomberg Intelligence estimates.

Assembly lines for the 737, 787 and 777 jets are all making planes at record pace, although monthly production for the 777 may need to be slowed by late next year unless more orders come in, according to an Oct. 19 note from Ken Herbert, a Canaccord Genuity Inc. analyst. Airlines have been looking ahead to the upgraded 777X due at the end of this decade.

Boeing bought back 8 million shares for $1 billion during the quarter, leaving $5.8 billion remaining under the current repurchase authorization. The company said it expects to complete that program by 2016.

Boeing calls its per-share results excluding some expenses “core earnings.” The planemaker adopted the measure last year, saying it gives a clearer picture by adjusting for market fluctuations in pension cost. Net income rose 18 percent to $1.36 billion, or $1.86 a share, from $1.51 a share a year earlier.