Boeing: Challenges Continue and Intensify (NYSE:BA)

After a somewhat turbulent start to 2024. Boeing(New York Stock Exchange: Bachelor’s), the company and its stocks are facing a difficult year. Current events may create new distractions, but they occur alongside previous and other product qualities. These events, which lead to problems and even fatal crashes, can no longer be viewed in isolation.

This comes on top of an already difficult few years for Boeing, with Airbus growing stronger and more leveraged amid the pandemic. The latter is a direct result of too much focus on shareholder value (rather than engineering and product quality), which is likely to cast a shadow over the business for some time to come.

go back a year

Last January, I was already concerned that Boeing’s stock price was flying too high at $210, and frankly, the stock was trading about $10 above that. current level. With the outlook for a tougher-than-expected year 2022 and 2023 unconvincing, I was already quite cautious at the time.

This whole problem really started in the early 2010s. Boeing’s stock price, which was performing well at the time, stayed in the $100 to $150 range. What followed was a focus on shareholder value, with the stock reaching a high of around $400 in 2019. That’s because more heavily indebted companies were hit by leverage and issues related to the 737 MAX as soon as they entered the pandemic.

The real problem with revenue falling 25% to $58 billion in the 2020 pandemic year was an adjusted loss of $14 billion. This is due to a sharp increase in net debt load due to losses, lack of cash flow conversion and existing net debt. 38 billion dollars.

Sales rose 7% in 2021 to $62 billion, but the company still posted a GAAP loss of $4 billion and net debt rose to $42 billion. In 2022, sales increased 7% to $66 billion (driven entirely by a 35% increase in fourth-quarter sales to $20 billion). Despite this, the company still posted a small operating loss while carrying $40 billion in net debt.

There was a bit of caution, but nothing outstanding, as the company guided for improvement in 2023, supporting a $120 billion stock valuation at $210 in early 2023 and taking into account its net debt load. The only positive is that the order backlog has increased by $27 billion to $404 billion, which requires diversion and those orders may also be cancelled.

Looking back at the company’s best performance in 2018, when it had $10 billion in revenue on $101 billion in revenue, I was modeling what the company could earn. Considering its leveraged balance sheet, which suggests earnings power of $15 per share, the company clearly has a long way to go to get there, so we’re cautious.

Around 2023

In the first half of 2023, Boeing’s stock price was absolutely tied to the $200 range, slightly above that figure in the summer and below that in the fall. A broad stock market rally pushed the stock price up to $260 by December, and after the recent recession, the current price has fallen to $218.

Last April, Boeing reported a 28% increase in first-quarter revenue to $17.9 billion and revealed an operating loss of $440 million in non-GAAP earnings, its so-called “core earnings.” The negative 2.5% margin was a significant improvement from the negative 10% margin and change from the previous year.

As reported last summer, second-quarter sales rose 18% to $19.8 billion. Core losses were still $390 million, larger than GAAP numbers and significantly worse than cash flow metrics.

Third-quarter revenue was reported in October to rise 13% to $18.1 billion, but results actually worsened as core operating losses widened to $1.1 billion (on a sequential basis). Of course, the inflationary timing is not conducive to improving margins, as net debt has been very stable at around $39 billion.

Moreover, these weaknesses are not only reflected in ongoing losses in its commercial aviation business related to ongoing quality issues with its 737 MAX aircraft, but inflation and quality issues also impact reported losses in its defense, space and security businesses.

The fact that net debt has been fairly stable despite ongoing losses has something to do with continued dilution. In fact, the share count has increased by about 11 million shares (or nearly 2%) over the past year, with trading above $200 per share absorbed this way, meaning a loss of about $2.5 billion.

And now?

Some practical challenges precede the latest safety concerns. While the company is seeing a continued recovery in sales, the company continues to post (significant losses), which is concerning and raises questions. But sales still aren’t back to pre-pandemic peak levels. Boeing, on the other hand, still has a great reputation among its customers, as its backlog actually increased dramatically from $404 billion to $469 billion in just nine months, even though inflationary trends are helping to increase this number.

The ongoing deficit was reduced and offset by dilution of shareholder equity. This means that net borrowings are stable despite the deficit. Despite its focus on shareholder value, the company is unable to post profits here. The recent recession has only compounded Boeing’s challenges, as the company is still in a difficult situation. This includes a leveraged balance sheet with huge negative asset positions, but the only positive is that the business is highly regarded by American politicians.

The problems with the 737 MAX are very serious. That’s because the entire 737 lineup will account for more than three-quarters of deliveries in the first nine months of 2023, dwarfing combined deliveries of the 747, 767, 777 and 787 programs. . After one of the cabin doors explodes in the air: Alaska Airlines Group (ALK) In the case of airplanes, it was CEO David Calhoun who said businesses need to recognize mistakes and trigger various safety inspections. There are approximately 188 schemes in operation today with the same configuration including these optional doors.

Moreover, in addition to grounding the aircraft, Boeing will also have to endure more oversight from the FAA at its factories and take more quality control measures, which will result in more costs and delays. Frankly, this is just a step that needs to be taken, but the real problem is a culture that has gone a long way from engineering to shareholder value, a multi-year transition that is very difficult to reverse and will take years. .

Of course, investors will know more about these issues later this month, as Boeing is scheduled to report fourth-quarter earnings on the last day of January. Of course, investors will focus on revenue, bookings and core earnings, but most attention will be on recent developments and the impact this will have in 2024. That’s because relatively little clarity is expected to be provided about this year’s expected numbers.

Given all this, it feels as if Boeing, once a great company and paragon of American engineering prowess, has lost its way, similar to the decline seen by many other large companies in recent years. This includes GE and others. 3M(MMM), especially. Considering the ongoing misfortune, the long time it will take to resolve this problem, and the ongoing losses, this problem can be avoided very easily.