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By Alwyn Scott
NEW YORK (Reuters) - Conservative profit and cash-flow forecasts spooked Boeing Co <BA.N> investors on Wednesday, sending the stock down 5 percent and overshadowing the company's strong fourth-quarter profit.
The aerospace and defense giant said core earnings, which exclude some pension expenses, rose 29 percent to $1.84 billion, or $1.88 a share, far exceeding forecasts as it delivered record numbers of its 737, 777 and 787 aircraft and upped production rates.
But Boeing was much more cautious about the current year. It said core earnings would rise only about 2 percent and operating cash flow would fall more than 20 percent.
Boeing said it still plans to return as much cash to shareholders through share buybacks and dividends as promised.
But investors have been betting on cash flow building to a substantial peak in coming years as Boeing churns out more planes, which could provide more cash returns.
"Now, everyone is having to recalibrate where's the summit," Ken Herbert, an analyst at research firm Canaccord Genuity Inc, said of the forecast. "There's a shift in sentiment here."
Boeing typically sets low targets at the start of the year and increases them as the months pass, so analysts said the news was not a game changer that would alter forecasts.
The company's defense business also grew more profitable in the latest quarter, thanks to earlier cost cutting, providing a stabilizing force.
Still, with the stock up more than 80 percent in 2013, investors reacted to the low forecasts by selling.
Shares in the Chicago-based company were down 5.7 percent at $129.31 in afternoon trading on the New York Stock Exchange.
Robert Stallard, analyst at RBC Capital Markets, said the stock's decline reflected "initial sticker shock" at the numbers, particularly cash flow. But if Boeing follows past practice, it will easily exceed those numbers.
A year ago, Boeing forecast full-year 2013 profit of up to $6.30 a share. By the end of the third quarter, the forecast had climbed as high as $6.65 a share. The actual figure topped that handily, at $7.07.
For 2014, analysts expect Boeing's core earnings to reach $7.57 a share, according to Thomson Reuters I/B/E/S. That would be an increase of about 7 percent.
The cash flow outlook was more troubling, since it directly affects investor returns through dividends and share repurchases.
Boeing forecast a 24 percent drop in operating cash flow after pension expenses in 2014, to about $6.25 billion.
That was a big jump from the forecast of a 13 percent drop a year ago, to about $6.5 billion.
Analysts had been increasingly optimistic and wide-ranging in estimates of the cash mountain, meaning there wasn't a clear consensus, Stallard said.
The latest forecast appeared to have grounded expectations a bit.
The cash forecast raised other questions, too: Might it reflect changes in plans for plane production or in Boeing's ability to cut the cost of making the cash-burning 787 Dreamliner?
Boeing Chief Financial Officer Greg Smith said there were no such changes. Boeing plans to deliver between 715 and 725 commercial airplanes this year, an increase of up to 12 percent from a record 648 in 2013.
He also said Boeing would use more than the targeted 85 percent of free cash flow to buy back shares and pay dividends, ensuring that those programs remain on track.
As if to counteract the commercial airplane jitters, Boeing's defense unit performed surprisingly well in the quarter. It posted wider profit margins, even as margins in the commercial airplane business narrowed.
The defense business had been under pressure from declining U.S. defense spending, and last summer Chief Executive Jim McNerney said the company was not out of the woods in facing earnings effects from automatic budget cuts known as sequestration. "We are entering the woods," he said.
On Wednesday, McNerney said the recent U.S. budget agreement had bought an 18- to 24-month reprieve from drastic defense spending cuts but still posed a grave risk.
"We remain very concerned about longer-term U.S. budget uncertainty" and a potentially "devastating impact" of defense budget cuts on the U.S. industrial base, McNerney said in a conference call.
Defense margins widened to 10.8 percent in the fourth quarter from 8.4 percent in the third quarter.
Defense companies had planned for the worst with budget cuts and have reduced their costs in anticipation, Stallard said. But the budget impact was not as bad as expected, "so across the defense sector you're seeing pretty decent margins."
Margins for commercial airplanes, meanwhile, shrank to 10.3 percent in the fourth quarter from 11.6 percent in the third quarter. But for the full year, commercial margins of 10.9 percent easily topped the forecast of greater than 10 percent, Stallard noted.
Boeing's latest results included a non-cash charge of $406 million to settle litigation over the canceled A-12 stealth bomber program.
The U.S. Justice Department announced a settlement with Boeing and General Dynamics Corp <GD.N> last week that includes three additional EA-18G fighter jets, which will be paid for by Boeing. <ID: nL2N0L309C>
Boeing said its earnings reflect a charge of 34 cents a share for the A-12 settlement, which was partly reduced by a 28-cent-per-share gain from a favorable change in tax regulations.
The tax benefit pushed the company's effective tax rate down to 14 percent. Net income in the quarter rose to $1.23 billion, or $1.61 a share, from $978 million, or $1.28 a share, a year earlier.
Boeing's quarterly core net income of $1.88 a share compared with $1.46 a share a year earlier. Revenue rose to $23.8 billion from $22.3 billion in the quarter. Analysts had expected core earnings per share of $1.57 for the fourth quarter, and revenue of $22.7 billion, according to Thomson Reuters I/B/E/S.
McNerney said he was not planning to retire, although former defense chief Dennis Muilenburg was now helping oversee the entire business following his promotion to chief operating officer in December, one of several management shifts.
"While you may be seeing more of them," McNerney said, "it doesn't mean you will be seeing less of me."
(Reporting by Alwyn Scott; Editing by Sophie Hares and Jonathan Oatis)