Boeing Impresses on Earnings, Operating Cash Flow

Wide-moat

Despite all the focus on earnings, we're still concentrating on cash and operating cash flow came in ahead of our expectations this quarter at $4.6 billion. However, Boeing kept 2018 cash flow guidance unchanged at $15 billion-$15.5 billion. Nothing in the results changed our view that while Boeing continues to execute and generate prodigious amounts of cash, its shares look slightly overvalued. That said, we're moving up our fair value by 2% to $330 due to the 2018 operating cash flow beat we're anticipating. We estimate $15.8 billion versus $15.5 billion for management's upper end of guidance.

Although Boeing expanded commercial airplane margins a whopping 340 basis points, GAAP consolidated operating margins contracted about 200 basis points coming in at 8.9% this quarter. Operating margins in the defense business came in at negative 4.3% compared due to initial investments (non-cash charges this quarter) on the T-X and MQ-25 programs, as well as a small KC-46 tanker charge of $64 million. Even after backing out these charges, defense margins contracted sequentially, and margins also fell about 70 basis points year over year. We're also not convinced that these are the last charges we'll see on T-X or MQ-25 given the fixed priced development contracts Boeing is under on each program and its history of taking charges on the similarly structured KC-46 contract.

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