Three months ago, Boeing (NYSE:BA) reported a huge loss due to a one-time charge to cover compensation to customers related to the Boeing 737 MAX grounding. The aerospace giant's cash flow turned negative, as well.
On Wednesday, Boeing revealed that it returned to profitability last quarter. Nevertheless, in many ways, the company's third-quarter earnings report was even worse than its Q2 results. The 737 MAX remains grounded -- with no firm schedule for recertification yet -- and two of Boeing's other commercial jet programs suffered setbacks.
Boeing posts a profit, but cash flow takes a turn for the worse
Boeing's revenue plunged 21% year over year in the third quarter, falling to $20 billion, due to 737 MAX deliveries being suspended indefinitely. The company has burned through virtually its entire backlog of prior-generation 737s, so it delivered just five 737s last quarter, down from 138 in Q3 2018. This accounted for more than 100% of its revenue decline in the quarter.
While Boeing's commercial airplanes division logged a $40 million loss for Q3 -- with an increase in projected costs for the 737 program offsetting profits from other aircraft families -- at least its defense and services businesses performed well. Those two segments achieved a combined operating profit of $1.4 billion. The net result was that core earnings per share (EPS) returned to positive territory at $1.45, down 59% year over year. Analysts had expected core EPS of $2.09.
Unfortunately, cash flow fell further into negative territory last quarter. Boeing burned a surprisingly modest $1 billion during the second quarter, but cash burn accelerated to $2.9 billion in the third quarter. The company also paid nearly $1.2 billion of dividends, further stressing its balance sheet.
Boeing ended the third quarter with $10.9 billion of cash and investments on its balance sheet, giving it plenty of liquidity. However, its debt load jumped to $24.7 billion, up from $19.2 billion a quarter earlier and $13.8 billion at the beginning of 2019. That number will likely continue to rise for at least one more quarter, if not two.
More setbacks acknowledged
Earlier this week, Boeing delivered its final 737 MAX software and training updates to the Federal Aviation Administration (FAA) for evaluation. It will take weeks to prepare for a certification test flight and -- assuming all goes well -- another month after that to recertify the 737 MAX, according to FAA chief Steve Dickson. This suggests that the grounding order won't be lifted until at least mid-December, later than what Boeing had projected as recently as this summer.
Boeing still hopes that it will be able to resume 737 MAX deliveries before year-end and ramp up to a production rate of 57 per month over the next year or so (compared to 42 per month today). However, the company has little margin for error if it is to achieve those targets.
On Wednesday, Boeing also acknowledged that delays in certifying the new engines for the upcoming 777X model will push the first delivery from late 2020 to early 2021, at best. This will reduce the total number of 777-family deliveries next year.
Finally, Boeing said that it will reduce 787 Dreamliner production from 14 per month to 12 per month in late 2020 for a period of approximately two years. The company cited the current global trade environment. Specifically, China is holding up expected orders for the 787 due to its ongoing trade war with the U.S.
Steer clear of this stock
Boeing stock rose about 1.5% on Wednesday, as of noon EDT. This could best be characterized as a relief rally after new revelations about Boeing's handling of the 737 MAX MCAS system caused the stock to plunge 10% in the span of two days over the past week. Investors were particularly happy that Boeing didn't change its estimate of customer compensation costs and didn't announce a complete suspension of 737 MAX production.
That said, even at its marked-down price, Boeing stock does not look attractive. The delayed entry into service of the 777X and the pending production slowdown for the 787 line will weigh on cash flow over the next few years, partially offsetting the windfall from delivering the already-built 737 MAX jets in Boeing's inventory. A substantial chunk of what's left will be needed to pay legal bills and fund the purchase of an 80% stake in Embraer's commercial jet business.
Moreover, the 737 MAX is Boeing's biggest growth driver -- or at least it was prior to the pair of fatal accidents that led to its grounding. It's too early to know how much long-term damage the 737 MAX franchise has sustained. Without more clarity on how the 737 MAX fiasco will impact Boeing's long-term growth, there's no reason for investors to bet on Boeing stock at its current valuation.