nycshooter
Elevator Pitch
I rate The Boeing Company’s (NYSE:BA) stock as a Hold.
In my prior May 31, 2022, update for Boeing, I assessed BA’s growth prospects for the intermediate term. With this latest article, my attention turns to Boeing’s most recent quarterly financial results announcement.
BA recorded a substantial net loss for the third quarter of 2022, and investors were clearly dissatisfied as seen with Boeing’s stock price correction on the day of the earnings announcement. But I don’t think that Boeing is a Sell after earnings. There are certain bright spots for BA in the quarter, and I have positive long-term expectations for the company in terms of cash flow generation and deleveraging. Therefore, a Hold, rather than a Sell, rating is the most appropriate for Boeing, in my opinion.
What Were Boeing’s Expected Earnings?
Before Boeing released the company’s Q3 2022 results, Wall Street analysts were expecting BA to generate a normalized earnings per share or EPS of $0.07.
In other words, the market had hoped that Boeing will turn around from net losses per share of -$2.75 and -$0.37 for Q1 2022 and Q2 2022, respectively to deliver positive earnings in the third quarter of this year. But sell-side analysts and investors were eventually disappointed, as discussed in the subsequent section.
Did Boeing Beat Earnings?
Boeing disclosed its financial performance for the third quarter of the current year on the morning of October 26, 2022. BA recorded a Q3 2022 non-GAAP adjusted net loss per share of -$6.18, which was way below the market’s expectations.
The key factor that led to BA’s massive third-quarter bottom line miss was “$2.8 billion of losses on certain fixed-price development programs” for the company’s Defense, Space & Security segment as highlighted in Boeing’s Q3 2022 results press release. At the company’s recent Q3 2022 earnings briefing, Boeing explained the substantial losses reported were attributable to “higher estimated manufacturing and supply chain costs” and “technical challenges” that “are expected to continue longer than anticipated.”
In a nutshell, it is going to cost Boeing a lot more money to complete specific programs that what it earlier anticipated because of the difficulties in securing parts and labor in the current operating environment.
BA Stock Key Metrics
But Boeing’s performance in the recent quarter wasn’t as poor as what its Q3 earnings miss implied. In fact, there are a couple of bright spots for BA as seen with certain metrics.
The first key metric for BA is cash flow; Boeing achieved positive operating and free cash flow in the most recent quarter.
The company turned around from a negative operating cash flow of -$262 million in Q3 2021 to deliver a positive operating cash flow of +$3,190 million for Q3 2022. Also, BA delivered a positive free cash flow of +$2,906 million in the recent quarter. This represents a vast improvement from the company’s negative free cash flow of -$507 million for the third quarter of the prior year.
Boeing also highlighted at its third quarter investor call that it is “committed to reducing debt levels through strong cash flow generation”, and emphasized that “our investment-grade credit rating is a priority.” In other words, Boeing’s improvement in cash flow generation will be a big boost to its deleveraging efforts.
Boeing’s second key metric is 737 deliveries.
BA revealed at its most recent quarterly earnings call that it is guiding for “375 737 airplanes” in 2022, and a “monthly delivery trend” in “the low-30s” for 2023. Boeing had previously suggested in late-July 2022 that it could possibly achieve 737 deliveries in the “low 400s” for the current year, but the market was already expecting lower 737 deliveries for BA considering supply chain issues. As such, Boeing’s updated 737 deliveries guidance for full-year 2022 and 2023 is pretty decent, and not as bad as feared.
The final metric for Boeing worthy of attention is the improvement in profitability for the company’s Global Services business segment.
The operating profit margin for BA’s Global Services segment expanded from 15.3% in Q3 2021 to 16.5% for Q3 2022 on the back of a +5% YoY increase in segment revenue to $4,432 million in the recent quarter. Boeing indicated at its Q3 2022 investor briefing that the “parts and distribution business” drove the top line growth and margin expansion for its Global Services segment in the most recent quarter.
In summary, Boeing did disappoint the market with its below-expectations bottom line, but there are still a couple of positive takeaways as mentioned in this section of the article.
What To Expect After Earnings
As per its third quarter results media release, Boeing has guided for “positive free cash flow” for full-year fiscal 2022.
BA’s management guidance is consistent with the sell-side’s consensus forecasts. Based on financial data sourced from S&P Capital IQ, Wall Street sees Boeing generating positive free cash flow of $3.3 billion and $697 million for Q4 2022 and FY 2022, respectively; BA’s free cash flow was negative for 1H 2022.
Is Boeing A Good Investment Long-Term?
At its Q3 2022 earnings call, Boeing’s CEO Dave Calhoun referred to the free cash flow metric as “a very clear indicator of performance, not just in the near term but also the medium and long term.” I agree with BA’s management that free cash flow should be the key yardstick that determines if Boeing is a good investment for the long run.
The current Wall Street consensus financial projections (source: S&P Capital IQ) point to BA growing its free cash flow and reducing its financial leverage over the next couple of years. Analysts estimate that Boeing’s free cash flow will increase further to $5.9 billion, $10.3 billion, and $10.6 billion for FY 2023, FY 2024, and FY 2025, respectively. The market also sees BA’s net debt-to-EBITDA ratio decreasing from 21.9 times (estimated) as of the end of 2022 to a mere 1.2 times as of end-2025.
As I indicated earlier in this article, I have observed a number of positives for Boeing in the recent quarter such as improved cash flow generation, reasonably good 737 deliveries, and the Global Services segment’s solid performance. This gives me the confidence that Boeing should be an attractive investment candidate in the long term, notwithstanding near-term headwinds like the recent earnings miss.
Is BA Stock A Buy, Sell, Or Hold?
I rate BA as a Hold. In the near term, investor sentiment towards Boeing’s shares is likely to remain weak due to its below-expectations bottom line, as evidenced by BA’s -9% stock price drop on the day of Q3 results release. On the flip side, Boeing’s long-term outlook remains good, with expectations of higher free cash flow and lower financial leverage in the years ahead.
Be the first to comment