Strong 2019 Guidance From Boeing

Boeing BA reported fourth-quarter and full-year results that beat consensus handily, and management gave 2019 guidance that featured 25% EPS growth. The only weak spot was cashflow. After strong cash generation in the third quarter, we were looking for operating cashflow above Boeing's $15 billion-$15.5 billion guidance but it landed right in the middle of this range at $15.3 billion. Despite the strong results, we're maintaining our fair value estimate of $330 per share and view shares as slightly overvalued.

Core EPS increased to $5.48 from $5.07 last year with operating earnings accounting for the bulk of this 8% EPS growth. Commercial airplane operating margins expanded 400 basis points year over year to 15.6%, noting that Boeing extended the 787 block. Revenue increased 14% in the quarter thanks to growth across all of Boeing's units with the defense business registering impressive 16% growth thanks to higher volume on F/A-18 and satellites. At the midpoint, 2019 guidance calls for $110.5 billion of revenue, a 9% year-over-year increase thanks to higher aircraft deliveries (900 versus 806 in 2018) and growth in services. Core EPS should land between $19.90 and $20.10, according to guidance, up 25% from 2018. Management believes it will generate at least $17 billion in operating cashflow during 2019.

Turning to the next generation midsize aircraft, or NMA, we were surprised to hear management indicate that authority to offer may be granted by its board in 2019 but that formal program launch wouldn’t occur until 2020. We thought management would secure ATO in March or April and then announce the NMA at the Paris Airshow in June 2019. Management, however, seems to be stretching out the time between ATO--which is tantamount to a launch--and a formal launch. Questions around whether the NMA's market is large enough may be prompting Boeing to build a larger order book than it normally would on a new program to assuage investors and customers.

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