Boeing's (BA -0.43%) recent second-quarter earnings report contained good and bad news, and there's plenty of food for thought for incoming CEO Kelly Ortberg. The question is, does the good news outweigh the bad enough to make the aerospace giant a stock worth buying in the hope of a recovery? Here's one viewpoint.
Boeing's good news
If there's one single metric that Boeing investors need to follow, it's the delivery rate on the Boeing 737 MAX. As most investors know by now, Boeing had to slow down production and, in turn, deliveries to improve manufacturing quality following a high-profile incident on an Alaska Airlines flight.
It's a significant issue for Boeing because airplane production is a high-fixed-cost activity. As such, a slowdown in delivery rates means revenue falls and is accompanied by severe margin pressure. Indeed, Boeing's commercial airplanes (BCA) operating margin declined to a negative margin of 17.4% in the first half (on 175 total airplane deliveries) of 2024 compared to a negative margin of 6.4% in the first half (on 266 total airplane deliveries) of 2023.
The report's biggest plus was the update on deliveries and production. As discussed previously, Boeing reported a sharp increase in 737 deliveries in June, and speaking on the earnings call, CFO Brian West said, "July will be more or less in line with June levels.
Plugging that assumption into the monthly delivery data shows the extent of the recent improvement. Moreover, West confirmed that the aerospace company expects to move towards a rate of 38 a month by year-end.
Data source: Boeing presentations. Chart by author.
The good news on the matter doesn't stop there. Management lauded the reactivation of a third 737 production line at its facility in Renton, and monthly production moved "from high single digits at the end of the first quarter to roughly 25 in June and July," according to West.
As a reminder, there's a difference between production and delivery rates (Boeing is now delivering 737 planes built before 2023, mainly to China and India). Still, both are moving in the right direction.
The bad news and uncertainty from Boeing's earnings presentations
Unfortunately, there's quite a lot of it. Boeing is a company with $57.9 billion in consolidated debt and only $12.9 billion in cash and marketable securities. As such, the last thing investors and debt rating agencies want to see is ongoing cash outflows.
Image source: Getty Images.
Still, that's precisely what they will get in 2024. In the first half, Boeing burned $8.26 billion in cash, and West expects more cash burn in the third quarter. Somewhat cryptically, he also said, "On the free cash flow outlook for the year, we are now expecting a larger use of cash than previously forecasted."
Going back to an investor conference in May, West didn't put a specific number on the expected full-year cash outflow and instead favored saying that the second half would be "positive Putting this together, it's hard to know what West means by "previously forecasted." Naturally, Wall Street analysts seized on the matter with Jefferies' Sheila Kahyaoglu asking about cash flow in the fourth quarter. Barclays' David Strauss asking with full year cash burn would be closer to $5 billion or $10 billion. Still, West declined to give a definitive answer to either question.
Image source: Getty Images.
In addition, analysts asked questions on two other potential headwinds in 2024. Namely, the negotiations over a new labor contract with the International Association of Machinists (IAM) and the potential need for investment in Spirit AeroSystems before the acquisition closed in mid-2025.
Outgoing CEO Dave Calhoun said he knows the "wage asks will be big" and "we're not afraid to treat our employees well in this process" while seeking to avoid strikes. As for Spirit, West said Boeing "will not be shy or bashful with any investments that are needed in order for long-term stability."
Finally, Boeing's defense, space, and security (BDS) segment had more bad news. In the quarter, the business took a $1 billion loss on problematic fixed-price development contracts, leading to a BDS loss of $913 million and a negative 15.2% margin.
Image source: Getty Images.
A stock to buy?
Boeing is undoubtedly sowing the seeds of recovery with improved airplane production and reactivating the third line in Renton. That said, a deteriorating cash flow situation is the last thing a highly indebted company needs, and it could get worse with the IAM negotiations and the potential need to invest in Spirit.
As such, there is too much uncertainty about the company's financial position to give most investors confidence in its outlook for 2024, let alone the medium term.
