Boeing (BA 347.60, -10.67, -2.98%) is trading lower after reporting Q2 results this morning.
Boeing is a supplier of commercial jetliners, military aircraft, satellites,
missile defense, human space flight, and launch systems and services. It's one
of the two major manufacturers of 100+ seat airplanes for the worldwide
commercial airline industry and one of the largest defense contractors in the
On the commercial aircraft side, Boeing offers a family of commercial jetliners designed to meet a broad spectrum of passenger and cargo requirements of airlines. This includes the 737 narrow-body model and the 747, 767, 777, and 787 wide-body models. Development continues on the 787-10 and certain 737 MAX derivatives and the 777X program.
On the defense side, Boeing makes jet fighters and missile systems; vertical lift, including rotorcraft, and tilt-rotor aircraft; mobility, surveillance, and engagement, including battle management, airborne, anti-submarine, transport, and tanker aircraft. Its primary defense customer is the US Dept of Defense. Boeing also has a sizeable Global Services segment, which provides services to its commercial and defense customers. Services include aviation services support, aircraft modifications, spare parts, training, maintenance documents, data analytics, and technical advice to commercial and government customers worldwide.
Turning to the Q2 results, core (non-GAAP) EPS came in at $3.33, which was better than market expectations. Revenue rose 5.2% year/year to $24.26 bln, which was slightly better than expected. Total company backlog at quarter-end grew to $488 bln, including 5,900 commercial aircraft. In terms of its outlook for 2018, Boeing reaffirmed its guidance for core EPS at $14.30-14.50. Revenue guidance was taken up slightly to $97-99 bln from $96-98 bln. While up modestly from $94 bln in 2017, it's good to see growth again after revenue declines in 2016 and 2017. BA also reiterated its 2018 guidance for 810-815 deliveries of commercial airplanes.
Breaking it down by segment, Commercial Airplanes Q2 revenue rose 1% to $14.5 bln reflecting higher deliveries and mix. Segment operating margin in Q2 increased to 11.4% from 9.0% last year, reflecting strong operating performance on production programs, including a higher 787 margin. During Q2, Commercial Airplanes delivered 194 airplanes, including delivery of the first 737 MAX airplanes to Jet Airways, Ethiopian Airlines, and Xiamen Airlines. The 737 MAX program celebrated the one year anniversary of entering revenue flight service and continues to be well received in the market with over 4,600 orders since its launch. The 777X program remains on track for delivery in 2020 as the first two test airplanes moved into the low-rate initial production line.
Its Defense segment saw revenue increase 9% to $5.59 bln. During Q2, this segment finalized a production contract for 28 F/A-18 Super Hornets for Kuwait, received contracts for 18 additional F/A-18 Super Hornets and 3 P-8 Poseidon aircraft for the US Navy, and was awarded a multi-year contract for 58 V-22 Osprey aircraft.
Its Global Services segment saw revenue increase 15% to $4.09 bln although operating margin dipped to 14.7% from 16.0%. During Q2, this segment was awarded an F/A-18 depot maintenance contract for the US Navy and Marine Corps and secured rotorcraft performance-based logistics contracts for the Netherlands.
In sum, Boeing's Q2 report was good overall, yet the stock is trading lower. Our take is that investors were perhaps disappointed that the EPS upside was more modest in Q2 than it was in Q1, which was a blowout quarter. Also, investors may be concerned that BA did not raise full year EPS guidance despite the upside result. Analysts expectations for EPS are actually above BA's guidance which tells us analysts think BA is being conservative. However, not raising guidance may cause some people to think maybe management is bit more cautious on 2H18. On a final note, be sure to keep an eye on Boeing suppliers, including ARNC, ATI, COL, GE, SPR, TDG, TGI and UTX.
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