Boeing Turbulence – Parts Shortage Grounds Growth

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During the pandemic, Boeing (BA) almost went bankrupt.

Orders dried up as Covid lay waste to the economic landscape.

Now, the company boasts a backlog of $363 billion…which is in jeopardy.

Spirit Aerosystems (SPR) supplies fuselages and other parts to Boeing.

When they miss deliveries, Boeing misses deliveries.

Right now, SPR is fighting product quality issues, labor shortages, and supply chain disruptions.

It’s so bad Boeing warned investors it may (likely) not meet its 450-plane delivery goal for the year.

But is the recent selloff overdone?

After all, the demand for commercial airplanes isn’t expected to slow down for the next 15 years. 

Boeing’s Business

We all know Boeing for its commercial aircraft. However, that’s just one component of the company’s business model:

• Commercial Airplanes (32% of total revenues) – From the 737 to the 787, this segment brings you the metal birds you love and even offers aftermarket service.
• Defense, Space & Security (39% of total revenues) – Think military aircraft, satellites, and even human space exploration. 
• Global Services (29% of total revenues) – From maintenance to digital solutions, this segment keeps customers flying high.
• Boeing Capital (less than 1% of total revenues) – Financing for those who need a payment plan.

Here’s one of the problems we saw in the company’s latest earnings presentation:

Source: Boeing Q2 2023 Earnings Presentation

Despite a huge pipeline, Boeing isn’t profiting from one of its largest revenue segments. The same goes for defense, space, and security.

In the quarterly filing, Boeing said it incurred ‘abnormal’ production costs of $450 million, $314 million related to the 787 program, and $136 million related to the 777X program.

The thing is, those ‘abnormal’ costs (engineering, rework, quality issues, etc) were present last year.

These actually started back in the fall of 2020, when the company found quality defects on the fuselages…all from Spirit.

Right now, it’s unknown how long these costs will plague the company.

Financials

Source: Stock Analysis

With the quality problems and the pandemic, Boeing barely survived 2020.

Revenues recouped some of their losses, but gross margins contracted by about 75%.

Yet, the company does generate positive cash from operations. However at $9.2 billion, that’s a fraction of the $15.3 billion earned in 2018 and doesn’t cover the $18.4 billion lost in 2020.

Net debt ballooned on the back of 2020’s problems, jumping from $5.3 billion in 2018 to $43.3 billion in 2020, though now down to $38.5 billion.

Subsequently, interest expenses exploded from $475 million to $2.5 billion per year during that same period.

Nonetheless, Boeing’s been digging itself out of a hole slowly but surely.

Valuation

Source: Seeking Alpha

Boeing isn’t exactly cheap here at 12.6x operating cash flow, especially compared to Airbus (EADSY), its chief competitor, which trades at 14.6x operating cash and doesn’t have the same quality problems.

Even Lockheed Martin (LMT) is barely more expensive and is arguably better run.

Growth

Source: Seeking Alpha

Boeing’s growth remains constrained by its production capabilities. In fact, we suspect Airbus’ forward guidance here understates contracts its won in the last 6-12 months.

Profitability

Source: Seeking Alpha

Similarly, Airbus’ gross margins are nearly double Boeing’s, making it far more attractive for each aircraft it produces.

However, Boeing’s free cash flow margin is listed as 2x Airbus’ margin. Part of this is Airbus’ Capex, which runs at $3.1 billion per year compared to Boeing’s $1.4 billion. However, even with no Capex, Airbus’s free cash flow margin would run 10.8%.

Our Opinion 7/10

We believe Boeing will eventually move past its quality issues. 

In the meantime, these problems will constrain revenue growth and cash generation.

We do see opportunity in shares provided you have a time horizon of 7-10 years.

Ideally, we’d look for an entry between $150-$175 per share to start building a position.

But keep an eye on the news and earnings. We want to see improvements in the bottom line.

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