Boeing Corp. BA has had a rough couple quarters. Since the March grounding of the 737 MAX, its next-generation passenger aircraft, Boeing has found itself under extreme political, regulatory, legal and media pressure. These stresses were readily observable in the the company’s second-quarter earnings report in July, which saw cash flow turn negative. The problems have only gotten worse for the venerable aerospace company in the months since.
Top line holds up, but bottom line suffers
On Oct. 23, Boeing reported earnings for the third quarter. While analysts were not expecting much, the company still managed to fall well short of an already much-lowered bar.
The only good financial news in Boeing’s earnings report was on the top line. Third-quarter revenue of $19.98 billion actually beat the analyst consensus estimate of $19.57 billion – if only barely. However, even this small relative victory is not likely to lift analysts’ and investors’ spirits much given that revenue was still down significantly from the $25.1 billion the company posted in the third quarter of last year.
The bottom line took an even more savage hit, with earnings per share falling well below analysts’ muted estimates. Boeing delivered earnings of just $1.45 per share, far short of the $2.14 consensus estimate. The year-over-year profit decline was far worse than that experienced by the top line. While year-over-year revenues were down a painful 21%, earnings fell by an agonizing 60%.
Cash flow turns negative as debt piles up
Boeing’s slimmed-down profit was not the worst of its problems. A more serious problem emerges when we consider the company’s evidently deteriorating cash and financing situation.
Operating cash flow was negative once again in the third quarter, marking the first time since 2010 that Boeing has had two consecutive quarters of negative cash flow. The company saw $2.4 billion in cash outflows during the quarter, a punishing reversal from the same period last year, when it reported $4.56 billion in positive cash flow.
At the same time as operating cash flow has turned negative, Boeing’s debt pile has grown rapidly. Boeing added $5.5 billion in debt to its balance sheet, increasing its total debt pile by an eye-watering 33%. Its cash balance, meanwhile, grew by just $1.3 billion. At the end of the quarter, the company's debt stood at $22.8 billion, versus $10.9 billion in cash. With ballooning debt and choked-off cash flow, it is hardly surprising that Boeing’s bonds have begun to slide.
Verdict
Boeing’s latest quarter was bad. Indeed, it was worse than analysts anticipated, despite many of them having slashed their estimates significantly – and even repeatedly. Even so, the market reacted to the latest earnings report with remarkable ebullience. Evidently, the market has decided to believe in the company’s guidance that the 737 MAX will be back in action post-haste, thus allowing Boeing to return to the good old days of big profits and hefty share buybacks.
Unfortunately, this rosy view demands a great deal of faith, not only in Boeing’s ability to execute as promised, but also in regulators’ willingness to let the 737 MAX fly. After two fatal crashes, it may take a while to win approval. It may take even longer to win back the confidence of commercial aircraft purchasers.
Boeing stock is still trading as if everything will be resolved in short order, but the economic reality is considerably darker than these optimists want to accept. Investors should expect things to get considerably worse before they get better. Betting that the share price will continue to defy gravity, in spite of worsening fundamentals, is a dangerous game.
Disclosure: Author is short Boeing.
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