Will Boeing Deliver on Operating Margin Estimates in 4Q17?



Boeing’s 4Q17 operating margin estimates

Analysts surveyed by Thomson Reuters expect Boeing (BA) to report an operating profit of $2.7 billion in 4Q17. Based on the $2.1 billion operating income the company recorded in 4Q16, this represents an estimated rise of 33% on a YoY (year-over-year) basis.

Analysts’ operating margin estimate for 4Q17 is 11.1%, whereas Boeing’s operating margin in the same quarter last year was 9.2%. This difference translates into an estimated rise of 190 basis points in 4Q17.

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Segmental operating margin

Boeing’s Commercial Airplanes division posted an operating margin expansion of 1.4% from 8.5% in 3Q16 to 9.9% in 3Q17. It’s the company’s largest segment by revenue and operating profit. The company’s second-largest vertical, Defense, Space, and Security, also reported an improved operating margin of 10.2% in 3Q17 compared to 9.8% in 3Q16. The third-largest segment, Global Services, however, recorded a contraction of 0.7% in its operating margin. Its operating margin contracted to 14.2% in 3Q17 from 14.9% a year earlier.

On a full year basis, Boeing’s operating margin for the commercial airplanes segment is projected to expand to 9%–9.5% in 2017 from 4.8% in its previous year. The segmental margin should expand owing to the impact of an accounting block extension on the Boeing 787 program.

Note that changing the accounting block could give the company the scope to reduce its average airplane price to sell more units with lower production costs. This could help to improve profitability in the long term. However, in the short term, it may not be the case. The company’s Defense division’s operating margin is expected to expand to more than 10.5% in 2017 compared to 10.2% in 2016.

Peers’ 2018 operating margins

For 2018, analysts expect Boeing’s operating margin to be ~11%, an expansion of 0.7% over last year’s expected margin of 10.3%. They expect Lockheed Martin’s (LMT) 2018 operating margin to expand to 11.6% from 11.5% a year earlier. BA’s industrial peer General Dynamics (GD) is expected to report a 13.3% operating margin in 2018, translating to an estimated contraction of 0.2% on a YoY basis.

Analysts expect Raytheon Company’s (RTN) operating margin to expand 0.3% to 13.5% in 2018 compared to the previous year. Analysts expect Northrop Grumman’s (NOC) 2018 operating margin to expand 0.2% to 13.2%.

Investors interested in exposure to industrial companies can consider investing in the iShares U.S. Industrials ETF (IYJ). Aerospace and defense companies make up 12% of IYJ’s portfolio holdings. Boeing makes up 5.3% of this ETF’s portfolio holdings.


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