Boeing has a lot of problems. Can one new CEO fix them all?
Since reporting second-quarter earnings last week, shares of Boeing (BA -0.57%) have lost $25 in value — a stock market decline of more than 13% — as of this writing. That should not come as a huge surprise, though.
Boeing’s earnings were truly awful. Bad enough, in fact, to cost Boeing’s CEO his job.
Boeing by the numbers
Boeing “missed earnings” in a big way last week. On the top line, revenue came in more than $300 million below expectations at $16.9 billion. On the bottom line, the company reported a net loss of $2.33 per share. The company’s cash flow statement showed a cash burn of $4.3 billion in a single quarter.
To put these numbers in historical perspective, sales declined 15% year over year, while losses grew 832%. Free cash flow — positive in last year’s Q2 — rolled over to turn negative. Cash burn, which was also negative in Q1, accelerated in the second quarter. So far this year, Boeing has burned through more than $8.2 billion total, reducing cash reserves to $12.6 billion, versus debt of $57.9 billion.
What’s going wrong at Boeing
Management blamed the declines on two factors primarily, citing “lower commercial delivery volume and losses on fixed-price defense development programs.” Commercial plane deliveries in the quarter totaled only 92 units, 32% fewer than in last year’s Q2, resulting in a 32% reduction in revenue at (what used to be) Boeing’s biggest business. In contrast, sales slipped only 2% at the company’s defense, space, and security unit.
Operating losses soared at both businesses, rising 87% at commercial airplanes and 73% at Boeing Defense, Space, and Security (BDS), with operating profit margins getting worse and worse at both units.
Only Boeing’s global services unit showed any improvement at all over last year, and even here, it was minimal. Revenues eked out a 3% gain, operating margins rose only 2%, and profit margins fell.
Help wanted: A new CEO for Boeing
Despite all the above evidence that all is not well at Boeing, CEO Dave Calhoun insisted the company is “making substantial progress strengthening our quality management system and positioning our company for the future.” But he won’t be around to see them.
Just minutes after earnings came out, Boeing announced that Calhoun would retire from Boeing after less than four years at the helm. The change was planned as Calhoun announced back in October he would step down once the company found a new CEO.
On Aug. 8, former Rockwell Collins and RTX exec Robert K. “Kelly” Ortberg will take over as CEO and attempt to fix what Calhoun couldn’t.
He’ll have his work cut out for him.
What needs fixing at Boeing
As is well known by this point, Boeing has multiple problems that need fixing, beginning with chronic issues with quality control in its commercial airplanes unit (doors falling off planes and whatnot).
As management confirmed, though, the company also must contend with a Pentagon push to shift more risk onto its contractors by insisting on fixed-price deals on defense contracts. This shift has already cost Boeing billions of dollars in write-downs for its Air Force tanker contract, for example, which Boeing won on a fixed-price bid, making Boeing nervous about entering into further such fixed-price deals in the future. The problem is, if Boeing refuses to sign fixed-price contracts, it may start losing defense contracts to competitors who will sign them. That could cost Boeing not only revenue in the future — but profits, too.
Scan a bit higher, and you’ll also find issues with Boeing’s space business (which is a small but not insignificant part of BDS). Specifically, a Starliner crew transport — the spacecraft that Boeing is depending upon to fulfill its multibillion-dollar commercial crew contract with NASA — is currently docked at the International Space Station, where it’s been stranded for the past two months. More than two weeks past its sell-by date, Boeing and NASA are still considering whether it’s safe to use Starliner to bring its two-astronaut crew back to Earth. If they ultimately decide it is not safe, NASA will presumably have to use a SpaceX Crew Dragon to retrieve the astronauts.
Such an ignominious end to Boeing’s ISS mission could conceivably put the final nail in Starliner’s coffin and convince Boeing to terminate its manned spacecraft project entirely, resulting in billions of dollars of write-downs for BDS — and even more billions of dollars of losses for Boeing itself.
What it means for investors
As a $100 billion blue chip stock, you wouldn’t ordinarily expect a company like Boeing to be a risky bet. However, the days when an investment in Boeing could be considered “safe” are at an end. Boeing hasn’t even been able to afford a dividend since 2020. And why not? According to data from S&P Global Market Intelligence, Boeing hasn’t been profitable since 2018.
Boeing today is a turnaround play, pure and simple. And an investment in Boeing is essentially a bet that new CEO Kelly Ortberg can fix what his predecessors have broken.