The Boeing Company (NYSE:BA) reported a significant in the third quarter of 2022, a net loss and investors were disappointed, as evidenced by the company’s stock price drop on the day of the earnings announcement. However, I do not believe Boeing is a Sell after earnings. Boeing had some bright spots in the quarter, and I have high hopes for the company regarding cash flow generation and deleveraging in the long term. As a result, in my opinion, a Hold rating rather than a Sell rating is more appropriate for Boeing stock.
What Were Boeing’s Earnings Expected to Be?
Before Boeing released its Q3 2022 results, Wall Street analysts predicted that the company would earn $0.07 per share in normalized earnings.
In other words, the market expected Boeing to turn around its net losses per share of -$2.75 and -$0.37 in the first and second quarters of 2022, respectively, and deliver positive earnings in the third quarter of this year. However, as discussed in the following section, sell-side analysts and investors were eventually disappointed.
Did Boeing Outperform Earnings?
On October 26, 2022, Boeing released its financial results for the third quarter of the current fiscal year. Boeing reported a non-GAAP adjusted net loss per share of -$6.18 in the third quarter of 2022, well below the market’s expectations.
According to Boeing’s Q3 2022 results press release, the critical factor contributing to Boeing’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. Boeing explained the significant losses reported at the company’s recent Q3 2022 earnings briefing as a result of “higher estimated manufacturing and supply chain costs” and “technical challenges” that “are expected to continue longer than anticipated.”
In a nutshell, due to difficulties obtaining parts and labour in the current operating environment, Boeing will have to spend significantly more money to complete specific programs than previously anticipated.
However, Boeing’s performance in the most recent quarter was not as bad as its Q3 earnings miss suggested. Certain metrics show that Boeing has a couple of bright spots.
The first key metric for Boeing is cash flow; in the most recent quarter, Boeing achieved positive operating and free cash flow.
The company has made a complete turnaround from a negative operating cash flow of -$262 million in Q3 2021 to a positive operating cash flow of +$3,190 million in Q3 2022. In addition, Boeing generated a positive free cash flow of +$2,906 million in the most recent quarter. This is a significant improvement over the previous year’s third-quarter negative free cash flow of -$507 million.
During its third-quarter investor call, Boeing also stated that it is “committed to reducing debt levels through strong cash flow generation” and that “our investment-grade credit rating is a priority.” In other words, Boeing’s improved cash flow generation will significantly aid its deleveraging efforts.
The second most important metric for Boeing is 737 deliveries.
Boeing stated during its most recent quarterly earnings call that it expects “375 737 aeroplanes” in 2022, with a “monthly delivery trend” in the “low-30s” in 2023. Boeing stated in late July 2022 that it could achieve 737 deliveries in the “low 400s” for the current year. Still, the market was already anticipating lower 737 deliveries for Boeing due to supply chain issues. As a result, Boeing’s updated 737 delivery guidance for fiscal years 2022 and 2023 is reasonable and not as bad as feared.
The final metric worth noting for Boeing is the company’s Global Services business segment’s improved profitability.
Boeing’s Global Services segment operating profit margin increased from 15.3% in Q3 2021 to 16.5% in Q3 2022, owing to a +5% YoY increase in segment revenue to $4,432 million in the most recent quarter. The “parts and distribution business” drove top-line growth and margin expansion for Boeing’s Global Services segment in the most recent quarter, according to the company’s Q3 2022 investor briefing.
In summary, Boeing disappointed the market with its lower-than-expected bottom line, but there are a few positive takeaways, as discussed in this article section.
What to Expect Following Earnings
According to its third-quarter results media release, Boeing has guided for The entire fiscal year had “positive free cash flow.” 2022.
Boeing’s management guidance aligns with sell-side consensus forecasts. According to financial data from S&P Capital IQ, Wall Street expects Boeing to generate positive free cash flow of $3.3 billion and $697 million in Q4 2022 and FY 2022, respectively; Boeing’s free cash flow was negative in the first half of 2022.
Is Boeing a Good Long-Term Investment?
Boeing CEO Dave Calhoun described the free cash flow metric as “an obvious indicator of performance, not only today, but also tomorrow the medium and long term” during the company’s Q3 2022 earnings call. I agree with Boeing’s management that free cash flow should be the primary metric used to determine whether Boeing is a good long-term investment.
Current Wall Street consensus financial projections indicate that Boeing will increase its free cash flow while decreasing its financial leverage over the next few years. Analysts predict that Boeing’s free cash flow will rise to $5.9 billion, $10.3 billion, and $10.6 billion in fiscal years 2023, 2024, and 2025, respectively. The market also expects Boeing’s net debt-to-EBITDA ratio to fall from 21.9 times (estimated) at the end of 2022 to 1.2 times by the end of 2025.
As I mentioned earlier in this article, I saw many positives for Boeing in the most recent quarter, including improved cash flow generation, reasonably good 737 deliveries, and solid performance from the Global Services segment. This gives me confidence that Boeing will be an appealing investment candidate in the long run, despite short-term headwinds such as the recent earnings miss.
Is it Better to Buy, Sell, or Hold Boeing Stock?
Boeing is a Hold for me. In the short term, investor sentiment toward Boeing’s shares is likely to remain negative due to the company’s bottom line falling short of expectations, as evidenced by the stock price drop on the day of the Q3 results release. On the other hand, Boeing’s long-term outlook remains positive, with higher free cash flow and lower financial leverage expected in the coming years.
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