The Boeing Company's Earnings Will Keep Flying High

On Wednesday morning, The Boeing Company announced that Q1 core EPS improved to $1.76. This figure was more than 10% ahead of the average analyst estimate for EPS of $1.56.

Boeing has a huge backlog of aircraft orders, and the company maintains that "commercial aviation remains a long-term growth industry." Indeed, even in the mature U.S. market, carriers like Delta Air Lines and Southwest Airlines are posting record earnings results and may be ready to start growing again. This should allow Boeing to significantly increase its earnings power in the next five to 10 years.

Boeing under-promises and over-delivers
Boeing stock hit a rough patch after the company provided its initial guidance for 2014 back in January, as the company forecast that core EPS would remain roughly flat this year. At the time, I explained that Boeing has a history of providing extremely conservative guidance.

Boeing's regularly exceeds its earnings guidance. Photo: Boeing


Sure enough, Boeing has already raised its full-year EPS guidance range to $7.15-$7.35 from the initial range of $7.00-$7.20. The company also posted a much better cash flow performance last quarter than in Q1 of 2013. Free cash flow increased from just $3 million in Q1 2013 to $615 million last quarter.

Boeing took advantage of its improving cash flow and strong balance sheet to return some excess cash to shareholders. This included about $500 million in dividend payments and $2.5 billion in share repurchases.

Strong product lineup
Boeing has basically settled its future product plans for at least the next decade. In a few years, it will start delivering the 737 MAX, a more fuel-efficient version of its best-selling 737 plane for short- to medium-haul flights. Last year, it rounded out the 787 Dreamliner family of wide-bodies with the 787-10, a direct competitor for the Airbus A350-900 and a potential replacement for older 777s.

Finally, Boeing unveiled its new 777X plane last fall. This will be the largest twin-engine plane in the world, and it will offer a massive improvement in fuel efficiency compared to jumbo jets like the Boeing 747 and the A340. The first deliveries are scheduled for 2020. While Airbus has worthy competitors for most market segments, there is plenty of room for two in the booming commercial jet market.

Boeing rounded out its Dreamliner aircraft family last year with the 787-10. Photo: Boeing

Growth opportunities
The biggest long-term-growth opportunities come from developing markets, where economic growth could lead to huge increases in air travel. However, even the fully developed U.S. market could offer significant growth opportunities.

Airlines have spent the last decade or so rationalizing, but they are now able to make key fleet investments. For example, Delta Air Lines is reaping the benefit of retiring old Boeing 757s in favor of brand-new 737-900ERs and replacing inefficient regional jets with used Boeing 717s that it is acquiring from Southwest Airlines. As a result, it is on pace to generate $2 billion-$3 billion of free cash flow in 2014.

Delta Air Lines is starting to replace its 757s with new Boeing 737-900ERs. Photo: The Motley Fool

Southwest Airlines is a little behind the curve because it is still working to integrate AirTran, but it's making solid progress toward its 15% return on invested capital goal. With most airlines back on a solid financial footing and profitability at an all-time high, growth becomes a more realistic possibility.

Delta recently put out an RFP to Airbus and Boeing for wide-body aircraft. Delta is primarily looking to replace its older 747s and 767s. However, Delta has been building an international gateway in Seattle, and it may be interested in adding more flights to Latin America from its Atlanta hub. Thus, the company could also be interested in some "growth" aircraft.

Southwest has hundreds of Boeing 737 planes on order, with hundreds of additional options. Photo: The Motley Fool

Meanwhile, Southwest has been cutting some flights in order to free up aircraft capacity for new opportunities in Washington, D.C., and Dallas. However, if it hits its return on invested capital target this year -- which seems almost certain -- Southwest will look to grow again. Southwest has more than 300 firm orders with Boeing over the next decade, but it also has more than 200 aircraft options. This could provide an important source of growth for Boeing.

Foolish bottom line
If investors were worried that Boeing's earnings growth was stalling out, the company's strong Q1 report should ease those fears. Based on Boeing's track record of keeping its guidance very conservative, there's a good chance that Boeing's EPS will exceed even its revised guidance.

Most importantly, Boeing has a strong product road map and plenty of growth opportunities. Not only are airlines looking to replace outdated aircraft but massive improvements in the industry's profitability could support fleet growth even in developed markets. Boeing is well positioned to cash in on these trends in the next five to 10 years and beyond.

Top dividend stocks for the next decade
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The article The Boeing Company's Earnings Will Keep Flying High originally appeared on Fool.com.

Adam Levine-Weinberg has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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