Boeing share drops as investors brace for cuts, profit hit

By Alwyn Scott

SEATTLE (Reuters) - Boeing Co braced investors on Wednesday for a rough 2016, forecasting lower-than-expected earnings and fewer plane deliveries largely because of production changes needed to boost output later in the decade, news that sent its stock down sharply.

The world's largest plane maker said it still sees a strong market for new aircraft despite slowing global growth and low oil prices.

Boeing said it expects passenger traffic to keep rising and announced plans to notch up 737 output to 57 a month in 2019. That would be the highest level ever for the single-aisle plane, as Boeing fights to slow rival Airbus SA's inroads. It is increasing 787 and 767 production as well.

Investors focussed on the short-term pain, and sent Boeing stock to its lowest since August 2011. Boeing closed down 8.9 percent at $116.58 on the New York Stock Exchange, the biggest decliner in the Dow Jones Industrial Average.

PRODUCTION CUT SURPRISE

The 737 production cut surprised analysts who had expected Boeing to maintain rates rather than risk losing market share to Airbus.

Boeing last week announced a production cut in the 747-8, now mainly a freight aircraft, that it said will keep the line running until retirement of older planes picks up in 2019.

Boeing also said Wednesday it would cut 777 output in 2017 as it switches to the upgraded 777X model, due out by 2020.

The cuts are probably no coincidence amid negative global sentiment, said Richard Aboulafia, analyst at the Teal Group. "In the here and now, there are reasons to worry," he said.

He and others saw the reductions as a sign of the difficulty Boeing has had selling the last few of the current 737 and 777 models. They noted the heavy discounting in a recent 737 sale to United Airlines .

Boeing said it expects global passenger traffic to rise 6 to 7 percent a year over the long term, above the 5 percent historical average. This would support higher production in 2017 and beyond.

Traffic rose 15 percent in China in the fourth quarter, even as that giant economy slowed, Chief Executive Dennis Muilenburg said on a conference call.

"Stepping up to 57 a month in 2019, continues a trend of confidence we see in the narrowbody market place in particular," Muilenburg said. "All of that is telling us that continuing to ramp up production to keep supply and demand in balance is the right thing to do."

For 2016, Boeing's centenary year, the company expects to deliver 740 to 745 planes, down from a record 762 in 2015.

"It's not as if they're wildly over-producing," said Charlie Smith, chief investment officer at Fort Pitt Capital. "Backlog is 5,800 airplanes."

Its forecast for 2016 core earnings of $8.15 and $8.35 per share was well below the average analyst estimate of $9.43, according to Thomson Reuters I/B/E/S.

"That decline was definitely a disappointment," said Ken Herbert, analyst at Canaccord Genuity.

Boeing reported weaker fourth-quarter profit, mainly due to an 84-cent-a-share charge announced last week for slowing production of the 747-8 jumbo.

(Reporting by Alwyn Scott in Seattle; Additional reporting by Sweta Singh and Ankit Ajmera in Bengaluru; Editing by Jeffrey Benkoe and David Gregorio)