Boeing (BA) reported its highly anticipated first-quarter results Wednesday morning. The big news, however, was the aerospace manufacturer pulling its 2019 guidance as it assesses the fallout of its 737 MAX issue and putting its share buyback program on hold.
The March-quarter results for this Trifecta Stocks portfolio holding come as little surprise given the known 737 MAX issues, and while removing its 2019 guidance is somewhat surprising, it reflects the uncertainty surrounding 737 MAX deliveries and the timing of Boeing's solution being approved and installed.
Revenue was $22.9 billion and earnings per share $3.16 in the first quarter, down 2% and 13%, respectively, year over year, which was primarily due to the 9% drop in commercial aircraft revenue.
When examining Boeing, its Commercial Airplanes business is arguably the most important one; it accounted for 60% of Boeing's revenue and 66% of its operating profit in 2018. It's also the one that is delivering uncertainty in the company's business model considering 737 MAX issues that include lower production levels, pushed- out delivery acceptances by airline customers and pending approvals for its software solution. The balance was derived from its Defense, Space, and Security segment (23%, 13%) and Global Services (17%, 21%).
The primary driver of the year-over-year drop in revenue and earnings was the Commercial Airplanes business, which saw a 19% decline in commercial aircraft deliveries during the quarter to 149 units. As expected, this was attributed to the 737 MAX deliveries. That falloff led to negative operating leverage during the quarter as evidenced by the segment's 17% drop in earnings year over year. More revealing, however, is the sequential comparison between the December and March quarter that showed a 37% decline in Boeing's commercial aircraft deliveries. And yes, this led to a sizable decrease in revenue and profits compared to the December quarter.
Even though Boeing cited increasing production levels for its 787 aircraft to 14 per month, it's still contending with the previously announced 737 MAX production cut and pushed-out deliveries. This uncertainty and the corresponding negative operating leverage it brings explains why Boeing has pulled its 2019 guidance, at least for now. Given that action, investors should be not be alarmed by the company putting its share buyback plan on hold.
On a positive note, there was no mention of cutting back its quarterly dividend, which was boosted by 20% during the quarter to $2.055 per share. At the current share price that offers a nice 2.2% dividend yield.
When we added Boeing shares to the Trifecta portfolio, we acknowledged the likelihood of a sharp cut in Boeing's 2019 guidance. Granted, the removal of that guidance is more than we or most on Wall Street expected, but when we look at the share-price reaction, which is up following the news, it strongly suggests investors see the long-term opportunity in the global aircraft market ahead as Boeing looks for FAA and other approvals for its 737 MAX solution. A key reminder of that is the 5,600 airplanes that comprise the Commercial Airplanes backlog, which has a value of roughly $400 billion.
We will remain patient with Boeing shares, and look to add to our position on any share price weakness from current levels should it emerge.
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