It has been a rough few years for Boeing (BA -0.76%) shareholders.
The company's troubles started with a pair of fatal 737 MAX crashes, which led to an 18-month worldwide grounding of the jet. The pandemic made matters worse, pushing commercial airlines into survival mode and cooling demand for new jets.
Those troubles are now largely behind Boeing, as evidenced by the company's strong 94% year-over-year revenue growth in the fourth quarter. But the stock is still more than 50% below where it was in early 2019 before the first 737 MAX crash.
The headline revenue growth looks impressive, but Boeing is far from healed. A look beyond the top-line number offers insight into the headwinds Boeing is facing and how soon investors should expect a turnaround.
Revenue is up year over year, but year over year doesn't tell the whole story.
"Better" but not great
Although that 94% commercial revenue growth figure was impressive, the quarter was also a reminder of how far the company's biggest division had fallen. In the fourth quarter of 2018, Boeing commercial reported $17.3 billion in revenue, nearly double the most recent quarterly figure.
There's also the issue of profitability. Boeing commercial generated a 15.6% operating margin in the last three months of 2018 but lost $626 million in the fourth quarter of last year.
And although commercial is the largest division inside Boeing, it is hardly the only one that has been sputtering. Boeing's defense business as a standalone would still rank among the world's largest defense contractors, and it didn't see the same demand freefall during COVID-19. But defense growth nearly flatlined over the past five years, with sales going from $6.11 billion in the fourth quarter of 2018 to $6.18 billion last year.
Defense was barely profitable in the 2022 fourth quarter and lost $3.5 billion in all of 2022. In 2018, by comparison, Boeing Defense posted a 10.9% operating margin in the quarter and a 6.9% margin for the year.
Boeing just isn't the jumbo jet it used to be
Across the board, Boeing is a much smaller company than it was just a few years ago. The company's total fourth-quarter 2022 sales totaled $19.98 billion, up big year over year but nearly 30% below the $28.34 billion in sales in the same three months of 2018. Full-year numbers offer an even starker comparison: Revenue in 2022 was $66.6 billion, compared to $101.13 billion in 2018.
Revenue doesn't tell the whole story. Since the end of 2017, Boeing's total debt has ballooned by more than 400%. On an enterprise value basis, which factors debt into valuation, Boeing is within 10% of where it was at the end of 2017. That suggests the stock is not undervalued even as revenue has bounced back.
Boeing management is committed to paying down that debt, with chief financial officer Brian West in January telling investors that the company's investment grade credit rating "continues to be a top priority." The company has won a number of high-profile commercial airplane orders that should help generate cash flow eventually but offer no quick fix.
There will be no quick turnaround
Boeing has come a long way since the early days of the pandemic, a period where the stock lost nearly 75% of its value. The company has made progress fixing the engineering issues that led to the 737 MAX problems, and has worked through redesigns and delivery delays with other models that sprung out of a post-737-MAX review of manufacturing practices.
It appears safe to say we are past a bottom on Boeing shares and predict that as the business heals and begins to use order flow to pay down its debt, the stock should be able to go higher from here. The issue is the timing.
Investors seemingly have bought into the turnaround, sending Boeing shares up 40% in the last six months thanks to the bullish headlines concerning revenue growth and major new orders. But it would be wise to remember that revenue growth is off of an artificially low base, and the orders announced today will take years to turn into free cash flow.
Boeing finally appears to be on the right course, but it will take years to reach its destination. Investors going along for the ride should pack a good amount of patience and understand that even with growth surging in the commercial business, there is still a long journey up ahead.
