Source: PaxForex Premium Analytics Portal, Fundamental Insight
Boeing's recent second-quarter earnings report presented a mix of positive and negative aspects, providing significant considerations for incoming CEO Kelly Ortberg. Is the good news strong enough to outweigh the bad, making the aerospace giant a worthwhile investment for those banking on a recovery? Here's one perspective.
A crucial metric for Boeing investors to monitor is the delivery rate of the Boeing 737 MAX. Due to multiple high-profile incidents over the past few years, including the recent emergency exit door incident on an Alaska Airlines flight, Boeing had to slow down production to enhance manufacturing quality. This production slowdown directly impacts revenue and imposes severe margin pressure on the company, given the high-fixed-cost nature of airplane production. In the first half of 2024, Boeing's commercial airplanes (BCA) segment reported an operating margin decline to a negative 17.4% on 175 total airplane deliveries, compared to a negative margin of 6.4% on 266 deliveries in the first half of 2023.
A key highlight from the report was the improvement in deliveries and production. Boeing noted a significant increase in 737 deliveries in June. During the earnings call, CFO Brian West mentioned that July deliveries would be similar to those in June.
Applying this assumption to the monthly delivery data reveals the extent of recent progress. Additionally, West confirmed that Boeing aims to reach a delivery rate of 38 planes per month by year-end. Furthermore, the company has reactivated a third 737 production line at its Renton, Washington facility, increasing monthly production from high single digits at the end of the first quarter to approximately 25 in June and July.
It's important to note the distinction between production and delivery rates, with Boeing currently delivering 737 planes built before 2023, primarily to China and India. Nonetheless, both metrics are trending positively.
However, there are significant challenges as well. Boeing faces substantial financial pressure, with consolidated debt totaling $57.9 billion and only $12.9 billion in cash and marketable securities. Continuous cash outflows are a concerning issue for both investors and debt rating agencies.
Boeing is set to face significant financial challenges in 2024. In the first half of the year, the company burned through $8.26 billion in cash, and CFO Brian West anticipates additional cash burn in the third quarter. West vaguely stated, "On the free cash flow outlook for the year, we are now expecting a larger use of cash than previously forecasted."
In a May investor conference, West avoided specifying the full-year cash outflow, suggesting instead that the second half would be "positive." This leaves ambiguity around what "previously forecasted" means. Wall Street analysts have picked up on this uncertainty. Jefferies' Sheila Kahyaoglu inquired about fourth-quarter cash flow, and Barclays' David Strauss asked if the full-year cash burn would be closer to $5 billion or $10 billion, but West did not provide definitive answers.
Additionally, analysts highlighted two potential challenges for 2024: negotiations for a new labor contract with the International Association of Machinists (IAM) and the potential need for investment in Spirit AeroSystems before an acquisition expected to close in mid-2025.
Outgoing CEO Dave Calhoun acknowledged that "wage asks will be big" and expressed a commitment to fair treatment of employees while trying to avoid strikes. Regarding Spirit AeroSystems, West assured that Boeing would invest as needed for long-term stability.
Boeing's defense, space, and security (BDS) segment reported more setbacks, with the business taking a $1 billion loss on problematic fixed-price development contracts, resulting in a BDS loss of $913 million and a negative 15.2% margin.
While Boeing is making strides with improved airplane production and reactivating its third production line, the worsening cash flow situation is troubling for a company with significant debt. The looming IAM negotiations and potential investments in Spirit AeroSystems add further uncertainty.
Given these financial challenges, there is substantial uncertainty surrounding Boeing's outlook for 2024 and the medium term, making it difficult for most investors to have confidence in the company's financial stability.
As long as the price is above 160.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 166.79
- Take Profit 1: 175.00
- Take Profit 2: 185.00
Alternative scenario:
If the level of 160.00 is broken-down , follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 160.00
- Take Profit 1: 155.00
- Take Profit 2: 150.00
