It was clear long before Boeing (NYSE:BA) reported its second-quarter earnings that the company would post exceptionally weak results due to the COVID-19 pandemic. Indeed, Boeing delivered just 20 commercial jets last quarter, down from 50 in the first quarter and more than 200 per quarter as recently as 2018.
Sure enough, Boeing reported awful results on Wednesday, missing analysts' already-downbeat estimates. Boeing stock sank 3% in response.
Furthermore, with airlines slashing near-term capacity and reassessing their long-term growth plans, investors can't count on a robust turnaround. As a result, while Boeing stock has lost more than half of its value year to date, it still looks overvalued.
Dreadful earnings results
Boeing generated $11.8 billion of revenue in the second quarter, missing analysts' estimates by 10%. This compared to revenue of $15.8 billion in the year-ago period, which was already negatively impacted by the 737 MAX grounding. Two years ago, Boeing brought in $24.3 billion of revenue in the second quarter.
Boeing's defense segment held up well, with revenue flat year over year at $6.6 billion. However, services revenue fell 23% to $3.5 billion as airlines grounded aircraft rather than reinvesting in them, while commercial airplanes revenue plummeted 65% to just $1.6 billion, due to the sharp reduction in deliveries.
Boeing reported a second-quarter core operating loss of $3.3 billion, more than half of which it attributed to a variety of one-time charges. Core loss per share was $4.79, nearly double what analysts were expecting.
Finally, cash burn accelerated again last quarter. Boeing burned through $5.6 billion in Q2, compared to cash burn of $4.7 billion in the first quarter. Boeing ended the quarter with $61.4 billion of debt and $15.7 billion of pension liabilities, offset by $32.4 billion of cash and investments.
Boeing slashes production plans again
In conjunction with its first-quarter earnings report three months ago, Boeing slashed its future production plans. Most notably, it said that 737 MAX production would ramp up gradually to a rate of 31 per month by late 2021. At the beginning of this year, the company still hoped to ramp up 737 MAX production to a record pace of 57 per month by April 2021.
The Q1 update also contemplated reducing 777 family output from five per month to three per month in 2021 and cutting 787 production to seven per month by 2022, down from 14 per month at the beginning of 2020.
Now, Boeing has pushed back plans to reach a 737 MAX production rate of 31 per month to early 2022. (Even that may prove overly optimistic.) More significantly, it will reduce 787 output to six per month and accelerate that production cut to 2021. Production of the 777 family will be reduced to just two per month next year, and the first delivery of the next-generation 777X -- already postponed from 2020 to 2021 -- is now scheduled for 2022.
As a consequence of these production adjustments, Boeing told employees that it is considering "consolidating [Boeing 787] production in a single location." This suggests that Boeing executives are not optimistic about a rapid market recovery that would require two production facilities to meet demand.
Boeing stock looks toxic
While Boeing stock has fallen precipitously in 2020 and trades more than 60% below the all-time high it reached last year, the company's exceptionally weak outlook means investors should stay away.
First, management warned investors on this week's earnings call that cash burn will continue in the second half of 2020, albeit perhaps at a somewhat slower pace. Given that Boeing burned through more than $10 billion in the first half of the year, that isn't much comfort.
Second, while CFO Greg Smith sees a path to positive cash flow next year, that's largely because Boeing is on track to deliver (and receive payment for) hundreds of aircraft that it built in 2019 and 2020 during 2021. This tailwind will fade in 2022 and 2023 as Boeing's inventory normalizes. Boeing also may receive a substantial one-time tax refund in 2021 related to its 2020 losses. Thus, while output will be higher in 2022 than in 2021, cash flow won't necessarily improve in lockstep with production.
Third, Boeing still has an estimated $7 billion of outstanding customer compensation payments related to the long-running 737 MAX grounding. It also faces what could be billions of dollars of liabilities to settle lawsuits and government probes related to the fatal 737 MAX crashes.
The net result is that it could take five years or more for Boeing to repair the balance sheet damage it has incurred in 2019 and 2020. Moreover, cash flow may never return to pre-pandemic levels, as aviation growth and aircraft demand will likely moderate to a more sustainable level going forward. Therefore, investors should avoid Boeing stock unless it falls to a much lower valuation.