Business Aviation

Boeing Co (BA.N) will turn out more jetliners at higher profit margins in coming years but sees looming risk in the defense sector as Pentagon spending cuts take effect, the company's chief executive said on Wednesday. The aerospace and defense company is cutting costs and raising inventories to prepare for more demand for jetliners, CEO Jim McNerney said in a conference call following release of Boeing's second-quarter earnings. At the same time, it expects demand for fighter planes and helicopters to taper off due to automatic U.S. defense spending cuts known as "sequestration." "We've seen some impact of sequestration, but we have not begun to see most of it yet," McNerney said. "We are not out of the woods at all."

Boeing signaled it will press ahead with efforts to speed up its commercial aircraft factories, perhaps beyond existing targets, as a counterweight to a worsening defense picture for 2014 and beyond. The company also is increasing foreign defense sales in anticipation of the budget cuts hitting aircraft programs.

Analysts said the company already appeared well positioned to deal with defense cuts and was performing well with commercial planes.

Boeing is "leading the charge in terms of taking out a lot of cost and has the defense business very well prepared to handle sequestration," said Sterne Agee & Leach Inc analyst Peter Arment.

STRONG RESULTS

Boeing's profit rose a better-than-expected 13 percent in the second-quarter, and the company raised its full-year forecast to reflect rising deliveries of commercial jets and strong foreign sales of military aircraft.

It said it booked $40 billion in new orders in the latest quarter, including for the Dreamliner 787-10, a stretch version of its new, carbon-composite plane.

The news sent Boeing shares up 1.6 percent in early trading to an all-time high of $109.48. The shares were at $106.76 in afternoon dealings, down about 1 percent, amid a declining overall market.

Boeing's strong second-quarter performance and its hefty share price suggested investors are not deeply concerned about a fire aboard a parked Ethiopian Airlines 787 at London's Heathrow airport earlier this month.

Investigators have traced the fire to two wires pinched together in an emergency locator beacon made by Honeywell International Inc (HON.N). Boeing called for airlines to inspect or remove the battery-powered devices.

The fire appeared to have no connection to the 787's high-power electrical system or to lithium-ion batteries that overheated earlier this year, prompting regulators to ground the plane for more than three months.

FASTER FACTORIES?

For the full year, Boeing said it now expects revenue of $83 billion to $86 billion, up from previous guidance of $82 billion to $85 billion. It forecast full-year earnings of $5.10 to $5.30 per share, up from its previous estimate of $5.00 to $5.20.

The increase reflects defense sales, mainly foreign orders. The company's forecast for commercial plane deliveries this year was unchanged at 635 to 645.

In the conference call, Boeing again signaled it is considering pushing jetliner production above already disclosed targets.

In response to questions, McNerney said the company may lift the production rate of its top-selling 737 jet to more than 42 a month. The company currently makes 38 a month and has said it plans to go to 42 next year.

"We can do that," McNerney said. "We see a clear path to execution and we are assessing the scenarios right now of how and where we would do that."

McNerney also said he expects a few hundred more orders for the 737 MAX in the next 12 months or so, helping Boeing catch up with sale of the rival A320neo plane from Airbus (EAD.PA). The A320neo was launched earlier than the MAX and has had more time to rack up orders.

CASH MOUNTAIN

As Boeing delivers more jets, it is building up a cash pile that it can use to reward investors. Analysts said that is a key factor drawing investor attention away from the 787 problems and driving up the stock price.

In the latest quarter, the company spent $1 billion on share buybacks and is authorized to spend another $1 billion in the second half.

"Presumably, this leaves plenty of firepower for future buybacks or dividend increases," RBC Capital Markets analyst Robert Stallard said in a note.

Jason Gursky, an analyst at Citigroup in San Francisco, said his current price target for Boeing shares is $122, based on prospects for a higher dividend, share repurchases, big orders from an upcoming air show in Dubai, and the official launch of the 777X, which could come later this year.

The defense sector and 787 problems pose risks, but so far they appear minimal, Gursky said.

Boeing reported free cash flow of $3.01 billion in the second quarter, up sharply from $552 million a year earlier.

Net income was $1.09 billion, or $1.41 per share. Excluding one-time items, it earned $1.67 per share.

Revenue rose 9 percent to $21.8 billion. Commercial aircraft revenue rose 15 percent. Revenue from the Defense, Space & Security unit was flat.

Analysts had expected $1.58 per share excluding one-time items, on revenue of $20.78 billion, according to Thomson Reuters I/B/E/S.

(Reporting by Bijoy Anandoth Koyitty in Bangalore and Alwyn Scott in New York; Additional reporting by Mridhula Raghavan in Bangalore; Editing by Saumyadeb Chakrabarty, Robin Paxtona and John Wallace)