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After a rather turbulent start to 2024 in the case of Boeing (NYSE:BA), the company and stock are setting up for a difficult year. The current events might create a new distraction, but together with previous and other product quality issues and even deadly crashes, such events cannot be seen in isolation anymore.
This comes on top of already a few difficult years for Boeing, amidst the pandemic, Airbus getting stronger, and leverage taken on. The latter is a direct result of too much focus on shareholder value (rather than engineering and product quality) which seems to cast a shadow on the business for some time to come.
Going Back A Year
In January of last year, I already feared that Boeing was flying too high, at the time a $210 stock, and frankly shares are trading some ten dollars above that level as of now. Amidst a tougher-than-expected 2022, and a non-convincing outlook for 2023, I was quite cautious already at the time.
All these woes really started in the early 2010s, when a decent-performing Boeing saw its shares stuck in a $100-$150 trading range. What followed was a focus on shareholder value, prompting shares to peak around $400 in 2019, as a more indebted business was hurt by leverage and issues with the 737 MAX, just as it entered the pandemic.
With sales down a quarter to $58 billion in the pandemic year 2020, the real issue was adjusted losses of $14 billion, as losses, poor cash flow conversion, and pre-existing net debt resulted in a rapidly increasing net debt load number, reported around $38 billion.
While revenues rose by 7% to $62 billion for the year 2021, the company still posted a $4 billion GAAP loss, with net debt increasing to $42 billion. 2022 sales rose another 7% to $66 billion (entirely driven by a 35% increase in fourth quarter sales to $20 billion). Nonetheless, the company still posted a more modest operating loss, as it torched along a $40 billion net debt load.
Supporting a $120 billion equity valuation at $210 early in 2023, and taking into account the net debt load, I was a bit cautious as the company guided for improvements in 2023, but nothing spectacular. The only real positive was a $27 billion increase in the backlog to $404 billion, but this requires conversion, and such order can be canceled as well.
Looking back at peak performance in 2018, when the company posted earnings of $10 billion on $101 billion in sales, I was modeling what the company could earn. Given the leveraged balance sheet, which would imply earnings power of $15 per share, but the company obviously was a long way from reaching this, making me cautious.
About 2023
For the first half of 2023, shares of Boeing were absolutely tied to the $200 mark, trading a bit above that number in the summer, and below that in the fall. A broad-based stock market rally pushed shares up to $260 by December, with shares now down to $218 after the latest woes.
In April of last year, Boeing reported a 28% increase in first quarter sales to $17.9 billion, with the non-GAAP earnings, so-called ¨core earnings¨ revealing a $440 million operating loss. Its negative 2.5% margins improved in a massive way from negative margins of 10% and changed in the year before.
Second quarter sales rose by 18% to $19.8 billion, as reported over the summer. Core losses still came in at $390 million, again larger than the GAAP number, and again much worse than the cash flow metrics.
In October, third quarter sales were reported up 13% to $18.1 billion, but the results actually deteriorated with core operating losses expanding (on a sequential basis) to $1.1 billion. Of course, inflationary times do not help to improve the margin picture, as net debt was pretty stable at around $39 billion.
Moreover, the weakness is not just seen with continued losses in the commercial aviation business, related to continued quality issues with the 737 MAX planes, but inflationary and quality issues also play a role in the losses reported in the defense, space & security business.
The fact that net debt is pretty stable despite the continued losses has to do with continued dilution. In fact, the share count has risen by some 11 million shares over the past year (or nearly 2%), and trading at over $200 per share that implies about $2.5 billion in losses have been absorbed this way.
And Now?
Ahead of the latest safety concerns, there are some real struggles seen. While the company sees a continued recovery in sales, the company continues to post (substantial losses), which is worrying and raises questions, although revenues are still not back to pre-pandemic peak levels. On the other hand, Boeing still has a great reputation among its customers, as the backlog actually rose sharply from $404 billion to $469 billion in the time span of just 9 months, although inflationary trends of course help to grow this number.
Continued losses have narrowed and are offset by dilution of the shareholder base, which means that net debt is stable, despite losses. Despite its focus on shareholder value, the company is not able to post profits here, as the latest woes likely only increase Boeing’s challenges on this front, while Boeing remains in a tough spot. This includes a leveraged balance sheet which includes a massive negative equity position, although the only positive is that the importance of the business, as deemed by the US politicians, likely is very high.
The issues around the 737 MAX are extremely serious as the entire 737 line-up was responsible for over three quarters of the number of deliveries in the first nine months of 2023, dwarfing the combined deliveries of the 747, 767, 777, and 787 program. Following the mid-air blowout of a cabin door at one of Alaska Air Group (ALK) planes, it was CEO David Calhoun himself who said that the business needs to recognize mistakes, triggering a range of safety inspections, with some 188 plans with the same configuration being in operation as of today, that is including these optional doors.
Moreover, more costs and delays will be incurred, as on top of grounding airplanes, Boeing will have to tolerate more oversight by the FAA at its factories, while more quality control measures will have to be taken in all likelihood as well. Frankly, these are just the steps needed to be taken, but the real issue is that of its culture, which has gone a long way from engineering towards shareholder value, a multi-year transition that is very hard to revert and will take many years.
Of course, investors will learn more about these issues later this month, as Boeing is scheduled to release its fourth quarter results on the final day of January. While the revenues, bookings, and core earnings will of course be a focus of investors, most attention will go to the latest situation and the impact on 2024, as I expect relatively little clarity to be provided on the numbers expected for this year.
Given all of this, it feels as if Boeing, once exemplary of US engineering strength and a great business, has lost its way, similar to the declines seen by many other big industrial names in recent years. This includes the likes of GE, 3M (MMM), among others. Given the continuation of the woes, but also the long time needed to fix this, in combination with continued losses, makes this a very easy avoid for me.
