Boeing Earnings Under Pressure

Boeing ( BA) has some questions to answer.

The aircraft maker, which will announce second-quarter results Wednesday morning, said a month ago that its once-vaunted 787 program faces more delays, a result of higher-than-expected stress at about three dozen points where the aircraft's wings are jointed to its body.

Boeing promised to update financial guidance when it announces earnings and to provide a new 787 development schedule "in several weeks."

Expectations are not high. Broadpoint Amtech analyst Peter Arment says it remains unclear whether the company will provide a new 787 schedule. "It's a big uncertainty whether there has been enough time since the delay announcement for them to have an accurate schedule," he says. "Enormous complexity is involved in these (stress) tests, and there's a sense we may not hear for a few more weeks.

In trading Thursday morning, Boeing shares were up 1.3% to $42.76 a share.

"Their future is certainly tied to the success of this program," Arment adds. Even after 60 cancellations this year, the 787 remains a showpiece product and accounts for 850 of Boeing's 3,469 outstanding orders.

Even with delays, deliveries are likely to begin years before deliveries of its principal competitor, the Airbus A350XWB.

A second question is whether Boeing will reduce full-year earnings guidance of $4.70 to $5 a share, which it provided at the end of the first quarter. "Odds are they will lower it," says Gradient Analytics analyst Brent Miller. "If they don't lower it, it will be a challenge to meet it." Analysts surveyed by Thomson Reuters obviously agree: they estimate full-year 2009 revenue to be $4.52.

Gradient focuses on finding financial warning signs for its client base of institutional investors, and Miller says "negative earnings quality signals are prevalent" at Boeing.

For instance, at the end of the first quarter, the company's cash flow from operations was $193 million, down 90%, even though Boeing made no pension plan contributions. "If pension contributions would have been kept even with Q1 2008 levels, cash flow from operations would have come in at minus $311 million," Miller says.

787 Dreamliner On Hold Again

Additionally, cash and cash equivalents as of March 31 totaled $4.2 billion, down 45% from a year earlier. "The combination of deteriorating cash flow position and a decline in cash collected from customers may make it difficult for Boeing to meet second-quarter estimates," Miller says.

For the quarter, analysts estimate earnings of $1.21. All 21 estimates fell in a narrow range between $1.14 and $1.32. Estimated revenue is $17.2 billion, up 1% from the same period a year earlier.

Arment says he expects earnings to be in line with estimates. "Boeing delivered 125 aircraft in the quarter, a healthy amount, (even as) they incurred additional costs," he said.

Overall, Arment says the long-term outlook for Boeing is favorable but not as bright in the near term. "If we are going to get a global recovery on growth and air travel recovers in the first half of 2010, the longer term is favorable for aerospace," he says.

But he notes the aftermarket for aircraft parts and service is "bottoming now," so he prefers companies such as Goodrich ( GR), which could be in a recovery when Boeing is still dealing with delays and shortfalls in aircraft orders.

AMR ( AMR), the first U.S. airline to report, said last week that it doesn't yet see an end to the slowdown in demand for travel, particularly business travel. "The advance book load factor is down by about a point and a half for the remainder of this quarter, on obviously a whole lot less capacity," said CFO Tom Horton, on an earnings conference call.

Horton acknowledged that American, like other carriers, continues to see passengers booking flights closer in to departure. "Unfortunately, that revenue has not turned out to be the best revenue," he said, an indication that price competition remains intense, even for close-in bookings.

Boeing shares climbed 2% Monday to close at $42.20. The shares began trading this year at $42.80 and have essentially returned to their Jan. 2 level. After hitting a 52-week-low around $29 on March 3, they traded as high as the $53 range in early June.

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