Boeing Stock Fails To Take Off Despite Bullish Future

The Boeing Company (NYSE:BA) reported third-quarter earnings before the opening bell on the 25th of October. In November 2022, I marked the stock as a strong buy, and since then the stock price performance with a 14.3% return compared to the S&P 500 (SP500) returning 13.1%. The stock price has declined since August this year as Spirit AeroSystems Holdings, Inc. (SPR) has been coping with quality issues requiring additional inspections and putting pressure on the Boeing 737 MAX deliveries, which are key to its balance sheet deleveraging process.

While I have a buy rating on BA stock, it remains important to keep an eye on the fundamentals as we anticipate significant improvement in the fundamental performance. However, we also need to keep in mind how much of it is already priced in or should reasonably be priced in at this point. In this report, I will be going through the third quarter results segment by segment and see how those compare to my expectations.

Boeing Misses Analyst Consensus

Analysts estimated $18.3 billion in sales and core earnings per share of negative $2.61. Boeing reported revenues of $18.1 billion and core earnings per share of -$3.26, missing expectations on the top and bottom lines. The story for Boeing basically is that demand for airplanes is high, but the ability to increase production is somewhat limited due to the current supply chain environment, while on the defense segment, we continue to see cost overruns offset by strong demand for aftermarket services and spares. So, against that backdrop that is not at all positive in all segments, Boeing needs to perform.

Boeing Commercial Airplanes Shows Boeing 737 MAX Pressure

During the quarter, Boeing saw drop decrease by 6%, but revenues improved by 25%, driven by higher Boeing 787 deliveries as well as higher Boeing 777F deliveries. While Boeing 737 MAX deliveries were weak overall, as expected, we also see the positive signs of higher Boeing 787 deliveries. I modelled the delivery mix and volumes and it does seem that the better pricing environment is now also reflected, though we cannot tell with certainty. The model I used was only able to closely replicate the reported revenues of $7.876 billion when incorporating the usual base prices for the Boeing 737 MAX and implementing price escalations both of which are positives if that is indeed the way to look at the revenues.

Research and development costs as well as the general and administrative expenses seemingly came in $190 million higher than expected. However, considering the revenues and the higher R&D costs as well as SGA, my calculation model would end up with a $680.2 million loss compared to the $678 million loss that was reported. So, I would say we are not seeing a huge discrepancy here.

On the Commercial Airplanes side, Boeing put out a mix of good and bad on forward projections with the company now expected to deliver 375 to 400 Boeing 737 MAX airplanes compared to a previous guidance of 400-450 airplanes. The production rate transition to 38 Boeing 737 MAX airplanes per month is expected to be complete by year-end while generally the expectation was that this would have been completed by now. The positive was that the Boeing 787 program is transitioning to a production rate of 5 airplanes per month. The program earlier transitioned to four airplanes per month, and given that wide-body airplanes sell for roughly three times the price of single aisle jets this is a positive as well as better cost amortizations that can be realized on higher production rates.

On the certification of future airplanes, there was no change in estimates.

Boeing Global Services Continues To Perform

Previously, Boeing Global Services was modelled as a $4.5 billion business with margins of 15% generating $675 million in profits. Since last quarter, I have increased my estimates to $4.75 billion on 16% to 16.5% margins generating $760 million to $783.75 million in profits. Year-over-year, Boeing saw revenues increase 9% with margins retreating somewhat but still generating $784 million in profits. Going forward, it will be interesting to see whether Boeing's margins and revenues will go back to the $4.75 billion and 15%, or whether the current elevated results are a better modeling of the results going forward.

Boeing Defense, Space & Security Continues To See Significant Cost Overruns

Boeing Defense, Space & Security remains a tough segment to estimate revenues and profits for. On the revenue side, we see that instead of providing quarterly stability the revenues fluctuate significantly sequentially, with revenues down around 12% but up 3% year-over-year. Boeing has been hammering on de-risking the business as it faces fixed-price contracts that are not profitable in the current cost environment driven by increased costs of labor and materials.

During the quarter, there was additional cost growth of $482 million for the VC-25B and $315 million on a satellite constellation program adding $797 million in losses. If we adjust for those costs, the operating margins would be in line with the negative 3% that I am currently using.

How Did Boeing Earnings Stack Up Against My Estimate

Having analyst estimates is nice, but a recurring element I see when comparing analyst estimates with the actual underlying business and performance it seems that on many occasions there is no realistic connection between the information available and the typical frame of operations for the businesses. So, investors should be extremely aware that not every miss is to be blamed on a company but can also be driven by analysts having unrealistic expectations or not adjusting estimates based on the latest information available. Similarly, beats can also be caused by analysts being too pessimistic. So, solely looking at it in a binary beat/miss way is not quite informative.

Boeing missed revenue estimates by $200 million which I would attribute to the revenues in the defense business. The miss of $0.65 per share or $392 million partially captures the $800 million cost growth in the defense business meaning that if Boeing had not had these costs, the company would have beat estimates. The reality, however, is different. While Boeing tried to de-risk the defense business last year cost overruns remain an inherent part of its non-performing segment.

Putting all numbers per segment together, I had been expecting revenues of $18.2 billion, $100 million higher than what Boeing posted. Segment operating profits would come in at $117 million with core earnings per share of -$1.47 compared to the -$3.26 posted. The deviations are caused by two items, namely the continued cost growth on the defense programs, which would bring the estimate to -$2.61 per share and the effective tax rate being -48.9% versus -15% assumed. Taking these items into consideration I would end up with a -$3.21 estimate, while Boeing posted -$3.26 per share in losses which is $0.05 higher than expected.

Boeing's Cash and Debt Remains Stable

Boeing had breakeven operating cash flow during the quarter, and with capital expenditures of $332 million, the free cash flow was negative $310 million. So, it is no surprise we saw no improvement in the cash position or consolidated debt. Net debt grew from $38.5 billion to $38.9 billion. So, it certainly was not a great quarter from a cash perspective either.

Boeing News: China, Boeing 787, and Spirt AeroSystems

In a note previewing management discussion points that could guide investors, I highlighted three key items namely:

• Guidance on deliveries
• Resumption of deliveries to China
• Agreement with Spirit AeroSystems on the Boeing 737 MAX and Boeing 787 programs.

Boeing's management was extremely reserved in providing tangible guidance. The guidance on deliveries came down for the Boeing 737 MAX program to 375-400 deliveries from 400-450 deliveries expected earlier. With 280 Boeing 737 MAX deliveries of which 69 were in Q3, it points to a strong end of the year. However, that is not enough to make the segment profitable by the fourth quarter management has indicated and my preliminary calculations show the same. The segment would likely be significantly less loss-making, but profitability is not yet in the picture.

On the subject of deliveries to China, there was no elaborate update other than pointing out that the progress has been encouraging and that the company is working closely with Chinese customers on recommencing deliveries. While that might be true, my weekly analysis has shown that while flight activity has improved for the MAX fleet in China one airplane remains to return to service and the last time an airplane was put back into service was in September. Without new deliveries and no sight of the last airplane that has already been delivered returning to service, the situation looks rather static with a lack of progress for weeks now. Another fact is that Boeing has been readying to restart deliveries to China since August but none of that happened yet.

On the subject of an agreement with Spirit AeroSystems, we didn't see any details, but that was also not to be expected. However, Spirit AeroSystems was mentioned 13 times during the call, and Boeing was keen on expressing confidence in Spirit AeroSystems and the new leadership.

Boeing: Drag Visible In Results, Bullish For The Future

I have a buy rating on Boeing stock, but that is mostly driven by rate hikes in the future and not so much the current results. The Q3 2023 results showed just that. Defense remains a drag on the entire company despite having de-risked in the previous quarters and the quarterly deliveries on the Boeing 737 MAX were weak due to the quality issues at Spirit AeroSystems. The good news is that Q4 should see significantly better delivery flow and the low deliveries are reflective of the quality issues that Boeing is now actively working on and do not reflect any other supply chain issues. This gives some confidence in the ability to increase rates next year and Boeing is already working on increasing the rate on the Boeing 787 program which is another positive. It was also good to see that while projected deliveries have come down, the free cash flow guidance has been maintained but that does not come as a major surprise given that the $3 billion to $5 billion range provided was quite wide.

Boeing stock lost 2.5% during the trading day following earnings, and the decline in stock price does not surprise me much. Earnings were not great, as the company saw further cost growth on defense programs while weak BCA earnings were already factored in but were softer on the back of higher R&D costs. The best way to describe it is that with the realities the company faced during the quarter, it managed its cash and debt well but other than that it was not great.

Whether The Boeing Company stock is a buy or not depends on your timeline for investment. If you want a fundamentally driven upside for this year or next year, buying Boeing stock is not for you. However, aligning yourself with the timeline that management has set targets for provides some upside.

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