Skift Take

Boeing has faced a long road back to being an investor darling. The 787 Dreamliner is now powering the company's growth rather than dragging it down.

Boeing Co. jumped as earnings rose on surging deliveries of the 737, the planemaker’s largest source of profit, and an unexpectedly large one-time gain from U.S. tax cuts.

The company pocketed a tax boost of $1.74 a share in the fourth quarter and expects more benefits to come this year. Corporate levies are falling just as the Chicago-based manufacturer starts to see large cash gains from its 787 Dreamliner after a decade of losses.

Lower taxes are combining with record jetliner deliveries to fuel the cash gush at Boeing, the biggest gainer on the Dow Jones Industrial Average in 2017 and so far this year. In an earnings report, the company predicted the first annual sales growth since 2015 and said operating cash flow, a focus for investors, would climb to $15 billion.

“The buyback and cash flow have been the whole story on the stock for the last year,” Ken Herbert, an analyst at Canaccord Genuity, said in an interview before the earnings were released.

Shares increased 5.5 percent to $356.32 before the start of regular trading in New York. Boeing had advanced 15 percent this year through Tuesday, the largest gain among the 30 members of the Dow Jones Industrial Average. The stock has more than doubled since the start of 2017 as Boeing surpassed General Electric Co. to become the largest U.S. industrial company by market value.

Adjusted fourth-quarter earnings were $4.80 a share, Boeing said, or $3.06 a share excluding the tax gain. Analysts had predicted $2.90 a share, according to the average of estimates compiled by Bloomberg. Revenue rose 8.9 percent to $25.4 billion, compared with the $24.7 billion analysts expected.

Steady Gains

As GE has stumbled, Boeing’s steady performance and willingness to hand shareholders bucketfuls of cash attracted investors, Herbert said. The aerospace manufacturer has pledged to return the equivalent of its free cash flow to investors through an $18 billion share buyback program and 20 percent dividend increase approved by directors in December.

Revenue has declined since 2015 as Boeing slowed deliveries of its highly profitable 777 jetliners amid waning sales and a shift to a new model. But earnings per share have continued to rise as buybacks contributed to a 15 percent drop in the company’s average share count.

Under CEO Dennis Muilenburg, Boeing has rolled out new planes such as the 737 Max and 787-10 with few glitches while rival Airbus SE battled engine delays for its A320neo and A330neo. Muilenburg’s campaign to make Boeing leaner has lowered the cost of goods and services.

The planemaker is forecasting sales growth in 2018 as Boeing lifts 737 output by 11 percent and pockets additional tax savings. Revenue will range from $96 billion to $98 billion, the company predicted, compared with the $93.6 billion expected by analysts.

Driving those increases will be another record-setting year of aircraft deliveries. Boeing expects to ship 810 to 815 airliners, up from 763 last year.

Tax Winner

For the manufacturer of the carbon-fiber 787 Dreamliner — a source of Boeing’s cash riches — the timing of new corporate tax cuts “could not have been much better,” said Douglas Harned, aerospace analyst with Sanford C. Bernstein & Co.

Boeing was able to claim deductions at the old 35 percent rate over the years it recorded cash losses on the Dreamliner. The aircraft wracked up almost $30 billion in production and inventory costs as Boeing worked out supplier snarls and compensated airlines for tardy deliveries. The company said it expects to be taxed at a 16 percent rate in 2018.

The balance of inventory and factory costs for the Dreamliner fell $590 million to $25.4 billion during the fourth quarter from the previous three-month period. Deferred production costs for the 787, Boeing’s most advanced plane, have declined 11 percent since peaking at $28.7 billion at the start of 2016.

Margin Goals

Muilenburg has set a target of double-digit profit margins for Boeing’s three main divisions by the end of the decade.

Quarterly revenue for the commercial airplane unit increased 7.5 percent to $15.5 billion as Boeing delivered a record 209 commercial aircraft including 148 of its 737, a workhorse for low-cost carriers. The operating margin was 11.5 percent compared with 8.3 percent a year earlier.

Boeing’s defense division sales rose 4.8 percent to $5.54 billion, while its 10 percent operating margin improved very slightly from a year earlier.

Sales for company’s global-services division, formed in mid-2016, climbed 17 percent to $4 billion while its operating margin of 15.4 percent fell more than a percentage point.

Investors have puzzled over the division, created last year from a hodge-podge of existing businesses providing spare parts, maintenance and consulting services. Muilenburg has touted it as a source of growth and profit, setting a $50 billion sales target over the next five to 10 years.

“The market doesn’t understand what that business is yet,” Carter Copeland, analyst with Melius Research, said in an interview prior to the earnings report.

©2018 Bloomberg L.P.

This article was written by Julie Johnsson from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to [email protected].

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Tags: Boeing, dreamliner, earnings

Photo credit: In this Oct. 19, 2015, photo, a worker walks in front of a sign at Boeing's 737 delivery center at Boeing Field in Seattle. Boeing's stock value increased strongly in 2017. Ted S. Warren / Associated Press

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