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Morningstar | Boeing Outlines Strong 2019 Guidance; Formal Decision on NMA in 2020 but ATO Still Likely This Year

Boeing 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.

Despite a formal launch potentially occurring in 2020 now and not in 2019, Boeing continues to stick with the 2025 entry into service for the NMA. Boeing maintains that it continues to protect a 2025 entry into service via risk reduction work and technology maturation, but we’d note that a 2025 service entry represents one of the most compressed development time frames ever for a clean sheet aircraft. Boeing stressed that even with an NMA launch research and development will remain steady as a percentage of sales relative to 2019. Management will achieve this thanks to ramping NMA development spending in 2020 and 2021 as 777X spending begins to fall. Although management didn't address it, we think capital expenditures are likely to move up with an NMA launch in 2021 and beyond. The fact that management is guiding to $2.3 billion of capital spending in 2019 and has previously mentioned $2.2 billion as the normalized level for capital expenditures underscores our view.

Although NMA continues to garner lots of attention, the 737 drives near-term growth and profits for Boeing and the company anticipates 90% of the deliveries in 2019 to be MAX variants compared with about half of the deliveries in 2018. It looks as if supplier issues have abated on the 737's aerostructures, but it sounds like CFM may be facing some difficulties preparing for the step up to 57 aircraft per month his year. Boeing typically steps up the rate at midyear, but we think this might slip a bit to the right should risks around production increases on the CFM Leap engine look too significant.