The Boeing Company (BA – Free Boeing Stock Report), a huge factor in the aerospace industry, reported share earnings of $1.06 for the December quarter, in line with our estimate of $1.12. For the past year, the company earned $3.95 per share, up sharply from only $1.87 in 2009, which was hurt by well-publicized development and production problems with the revolutionary (mostly composite instead of aluminum) 787.
To put Research & Development spending in perspective; this key charge was less than $2 billion annually in the decade before 2004; it then rose swiftly, reaching $3.8 billion in 2008. But in 2009, R&D was a monumental $6.5 billion. This charge largely reflected the repeated rebuilding of three test 787s. Boeing decided that so many changes had been made that the aircraft had become unsaleable. Further, the company determined that the very-large upgraded 747-8 had suffered from so many disruptions and delays that the program was now in a "loss position", meaning that after the charge to R&D in 2009, shipments, which should begin in mid-2011, will be booked at breakeven. Last year, R&D declined a bit to "only" $4.1 billion.
Meanwhile, the company's earnings guidance has been reduced. It now looks for $3.80 to $4.00 per share for 2011. Accordingly, we estimate share earnings of $3.85 this year.
There are two important factors that have reduced Boeing's and our 2011 expectations. One is pension expense, which management estimates at about $1.58 per share, up $1.00 from the amount expensed in 2010. The other factor is continued high spending on R&D, which is related to protracted problems with development of Boeing's new 787 airliner and the "dash 8" 747. The company estimates R&D expenses at $3.7 billion to $3.9 billion in 2011.
After seven postponements, deliveries of the 787 are now scheduled to begin in the third quarter. But these shipments are likely to be low margined, since early sales of the new airliner were made at heavily discounted prices. In addition, remember that the 747-8 sales will be booked at breakeven, which also narrows margins.
Many investors seem to be looking beyond 2011, expecting that shipments of the 787 and other models will send share earnings climbing up at a sterling pace. Assuming Boeing gets its act together and begins producing the 787 without further incident, such a scenario is possible. At yearend, the company had 847 firm orders for the 787 from 57 customers. And production schedules for the popular 737 and the large 777 are being increased. Overall, Boeing has firm orders for 3,443 jetliners valued at $246 billion. And the total company backlog stood at $321 billion, five times last year's top line.
About The Company: The Boeing Company is a leading manufacturer of commercial jet aircraft. It also produces fighters (F-15, F/A-18), C-17 cargo carrier, V-22 helicopter, E-3 AWACS, E-4 command post, E-6 submarine communicator, ground transportation systems, develops the space station, and does work on the F-22 (ATF). At 12/31/2009, foreign sales were 42%; R&D, 9.5%; the depreciation rate, 7.7%. The company has roughly 159,600 employees.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.