Last Wednesday, Boeing (NYSE: BA) delivered another solid quarterly earnings report. Most importantly, the company’s run of strong cash flow continued , allowing it to return even more cash to its shareholders.
On Boeing’s earnings call, CEO Dennis Muilenberg and CFO Greg Smith elaborated on how the company aims to maintain its momentum in the coming years. Here are five key highlights from their remarks.
Lofty goals remain in place
We continue to expect operating cash flow to grow annually through the end of the decade, and we remain committed to returning approximately 100% of free cash flow to investors.
— CFO Greg Smith
In the Q3 earnings report, Boeing raised its 2017 cash flow forecast. The company now expects to generate operating cash flow of approximately $12.5 billion this year, substantially above its initial forecast of $10.75 billion.
Boeing expects to continue growing its cash flow for the next few years. Image source: Boeing.
This means that Boeing will face much tougher year-over-year cash flow comparisons going forward. Nevertheless, Smith reiterated the company’s projection that cash flow will improve each year through the end of the decade. This implies that Boeing will be producing stellar free cash flow results by 2020.
The services business gets off the ground
We think we have a lot of upside in our core parts business as we rebuild intellectual property and some of our vertical capabilities, and we expect that to create life cycle value. I would say in terms of percent growth opportunity, that we really see the greatest opportunity in our digital aviation and analytics portfolio, as we drive information-based solutions.
— CEO Dennis Muilenberg
During the third quarter, Boeing began operating its services portfolio as a separate business segment. (Previously, services offerings were housed in the broader commercial and defense segments.) Boeing expects to produce services revenue of $14.0 billion-$14.5 billion in 2017 — but it has big growth aspirations. The segment’s revenue could rise as high as $50 billion within a decade, according to management.
Boeing believes that having a unified services business to serve commercial jet and defense customers will be a big competitive advantage. In the short run, management sees substantial growth opportunities in spare parts, maintenance, and aircraft modifications.
Longer term, Boeing has a huge opportunity to add value through analytics solutions that glean insight from the massive amounts of data generated by airplanes. The company is already gaining traction in this area, but it is just scratching the surface of the market’s potential.
Another 737 production increase could be in the cards
Our planned production rate for the 737, growing to 57 per month in 2019, is based on our backlog of over 4,400 aircraft and a production skyline that is oversold through the end of the decade. We continue to assess the upward market pressure on the 737 production rate.
Rising production of Boeing’s workhorse 737 jets will be a key driver of the company’s projected cash flow growth. Last quarter, Boeing increased production from 42 a month to 47. It is already preparing to increase production to 52 a month next year and 57 a month in 2019.
Despite this planned production growth, demand for narrowbody aircraft continues to outpace supply. Boeing has seen another uptick in 737 orders and commitments this year, supported by the launch of the new 737 MAX 10 model. As a result, Boeing is evaluating pushing 737 output even higher. The biggest constraint on raising production beyond 57 per month is ensuring that the supply chain will be able to keep up.
The 777 situation is stabilizing
For the current-generation 777, we have 101 orders in backlog. We continue to make progress on filling the remaining 777 production slots…
Among Boeing’s five commercial aircraft families, the 777 has been the biggest disappointment recently. Last quarter, Boeing reduced the 777 production rate to five per month, down from 8.3 per month just a year ago. Furthermore, monthly deliveries to customers will decline to 3.5 per month for much of the next two years as Boeing shifts to building the next-generation 777X.
Boeing has reduced its 777 production rate twice in the past year. Image source: Boeing.
However, Boeing has seen a modest uptick in orders for the current-generation 777 recently. Just since the beginning of September, it has booked an order for six 777s from Aeroflot and an order for 10 777s from an unidentified customer, while China Southern Airlines has announced plans to buy eight more 777s. Boeing has now filled its 777 order gap for the next few years, addressing a potential risk to its cash flow forecast.
The 767 could make a comeback
We continue to feel very strong about the 767 production line. As you note, we just recently stepped up to 2.5 a month on that production line. … The fact that we have a combined line that can serve the needs of our commercial and military customers is a unique strength of that line.
Not too long ago, it looked like the aging Boeing 767 family was on the way out, ready to be replaced by the 787 Dreamliner. However, Boeing has seen surprisingly strong demand for the 767, which first entered service 35 years ago. FedEx (NYSE: FDX) has added 48 767 freighters to its fleet since 2014. It has another 68 on order through 2023. Meanwhile, production of the KC-46 military tanker is ramping up on the same assembly line.
It now appears that Boeing has a shot at winning a big order for 767-300ER passenger planes if it can boost its output. (At the current production rate, the 767 line is virtually sold out through 2023 just based on orders from FedEx and the U.S. military.)
It would be a bold move for any airline to buy such an outdated model. But the 767-300ER could be a good stopgap measure while airlines wait for better options from Boeing and Airbus . And 10-15 years down the road, any new-build passenger 767s could be converted to freighters for the likes of FedEx and UPS , providing more work for Boeing’s services business.
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Adam Levine-Weinberg has no position in any of the stocks mentioned. The Motley Fool recommends FedEx. The Motley Fool has a disclosure policy .
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