Overwhelmingly positive fiscal 2017 second-quarter earnings that surpassed estimates, mind blowing increase in operating cash flow, and upwardly revised FY17 EPS guidance propelled the stock of aircraft manufacturer Boeing Company (NYSE: BA) to a new 12-month high of 246.49 on the last day of July.
Since then the stock has undergone a healthy correction. On the basis of strong quarterly performance and the steps taken to boost revenue, we anticipate another rally to begin soon.
The Chicago-based company reported a marginal decline in the second-quarter 2017 revenues to $22.74 billion, from $24.76 billion in the second-quarter last year.
The Consensus estimates of FactSet analysts were $23 billion. The decline in revenue was mainly due to a cut in the production of 777 wide body jetliners. Additionally, Boeing also delivered fewer 737s. However, these cuts were planned before to make room for the production and delivery of 737 MAX 8.
Boeing also reported a swing to profit of $1.76 billion, or $2.89 per share, in Q2 2017, compared with a net loss of $234 million, or $0.37 per share, in the same period a year ago. Core operating earnings in the recent quarter were $2.21 billion, or $2.55 per share, compared to a net loss of $488 million, or $0.44 per share, in Q2 2016. The quarterly earnings exceeded the Wall Street analysts’ Consensus estimates of $2.30 per share.
The world’s biggest aircraft manufacturer reported a 4% decline in military aircraft sales to $6.8 billion. However, profit and margins increased 50% and 4.6%, respectively, mainly due to cost-cutting.
Boeing’s free cash flow of $4.50 billion in the June quarter was almost double the FactSet analysts’ estimates of $2.50 billion. The company is planning to use the additional cash to increase share buybacks to $10 billion in fiscal 2017, from $6.50 billion estimated earlier. Boeing also intends to set aside $3.5 billion for pension related costs, thereby reducing future costs.
The company aims to increase the annual revenue from its service business to $50 billion in the next five to ten years, from the current level of $14 billion.
The aggressive cost cutting process enabled Boeing to raise its outlook for FY17 core earnings by $0.60 to a range of $9.80 to $10.0 per share. The guidance does not include pension related costs. Boeing also raised its free cash flow forecasts to $12.50 billion, up from $11 billion issued earlier.
Following the impressive quarterly earnings, Credit Suisse raised their rating to outperform, from neutral rating, and upwardly revised their stock price target to $300. Thus, considering the impressive earnings, strong free cash flow, and upwardly revised FY17 estimates, we forecast a rally in the stock of Boeing.
Technically, the price chart indicates support for the stock at 237. The MACD is rising and making new highs. Additionally, the bullishness is also confirmed by the ascending momentum indicator. So, we forecast a rally in the stock price.
To gain from the uptrend, we wish to invest in a call option offered by a credible binary broker. The option should remain active for a period of one week. Additionally, a strike price of $231 is preferred for the trade.