Boeing Has Bottomed. It Could Recover Quickly.

The BoeingBA
Company’s second-quarter results were a mixed bag. Year-over-year, revenues were flat, earnings were weaker, cash flow was stronger.

A casual observer could easily conclude that the nation’s biggest aerospace enterprise has spent the last year moving sideways, despite CEO David Calhoun’s assertion that “We made important progress across key programs in the second quarter and are building momentum in our turnaround.”

Much of the investment community responded with characteristic impatience, but that’s what you expect when you are in a long-cycle business dealing with people who live and die based on the latest quarter.

A look behind the numbers suggests that Calhoun is right, and that Boeing’s road back from one of the toughest periods in its 106-year history may not take as long as some analysts expect.

It’s not as though setbacks are anything new for the company. When World War Two ended, Boeing’s vast defense workforce shrunk by 90%. A generation later, its commercial workforce shrunk by 75% due to a Nixon-era recession.

Thus when Boeing observes on its website that the aerospace industry is resilient, it knows of whence it speaks. The company is a longtime contributor to my think tank, so this isn’t the first rough patch I have watched it overcome.

Nobody ever claimed that recovery from twin crashes and grounding of its most important product would be linear. Nor was it likely that the aerospace sector would simply bounce back to normalcy from a global pandemic. Competitor Airbus is learning the same lessons about the fragility of supply chains that Boeing is.

But the ValueLine investment survey estimates that Boeing will be back to $100 billion in annual revenues by mid-decade, a number the company has only managed to top once in its history—2018, the year the first 737 Max crashed in Indonesia.

That tragedy, compounded by the pandemic, has made the company’s recent problems seem like they might be a chronic feature of the aerospace landscape.

But look closer, beginning with Boeing Commercial Airplanes, the part of the company that builds jetliners and in a normal year generates two-thirds of sales.

The 737, Boeing’s only single-aisle jetliner and still the most widely used in the world, has returned to service and seen 189 deliveries so far in 2022. The company figures it will deliver 400 this year, maybe more if China lifts restrictions. Half of the nearly 300 finished but undelivered 737s in inventory were originally destined for China.

Any residual doubts in the marketplace about Max, the only version of 737 still in production, seem to be receding fast. Delta announced an order for 100 Max at the Farnborough Air Show, Vietjet recommitted to 200 Max, Norwegian recommitted to 50, and half a dozen other carriers formalized orders.

Boeing said in its earnings call that it expected FAA certification of two additional variants of 737, the Max 7 and Max 10, later this year. So, the company’s most important commercial product will likely be generating steady cashflow for the rest of the decade.

With regard to widebodies, CEO Calhoun signaled that production problems with the highly profitable 787 Dreamliner have been resolved, and the highly profitable twinjet will likely resume deliveries in the third quarter. With 120 finished aircraft in inventory, Adam Levine-Weinberg of The Motley Fool figures Dreamliner could generate up to $10 billion in cash over the next two years.

The 777X, destined to be Boeing’s biggest widebody once production of the 747 ends, has seen its initial deliveries pushed back to 2025 (the original plan was for 2020). However, its operating economies will make it a formidable competitor in the widebody segment of the market at a time when international travel is expected to be fully recovered from the pandemic.

So, Boeing’s commercial aircraft business is poised to come roaring back as the remainder of the decade unfolds. The company may not be able to match Airbus sales of narrowbody jetliners, but its lucrative widebody franchises are likely to best the offerings of the European plane maker.

Boeing Global Services, which leverages its sales largely off the company’s installed base of commercial airliners, performed well in the second quarter, growing its revenues year-over-year by 6% (to $4.3 billion) and its earnings by 37%. The company’s footprint in services remains relatively small compared with its share of the global commercial fleet, which implies opportunities for further growth in the years ahead.

Operating margin at Global Services, which stood at nearly 17% in the second quarter, is more robust than the margins in Boeing’s manufacturing businesses. That vindicates the decision to make services a separate profit center with its own cost structure.

But then there is Boeing Defense & Space, which has been a chronic under-performer in recent years. The business unit has lost key competitions while failing to execute on the new business that it won. Earnings declined 93% year-over-year in the second quarter, due in no small part to charges taken against several military programs.

Most of these programs, including a new tanker and trainer for the Air Force, look secure going forward. Whether they generate reasonable rates of return is another matter. Defense operations are likely to be more of a drag on results than commercial ops by mid-decade, despite robust levels of domestic military spending.

However, there is little sign that Boeing corporate is planning to jettison its defense business. As results have demonstrated since 2018, it is helpful to have a business unit not dependent on the commercial business cycle to smooth out revenues and returns during the lean years. The question is whether Boeing Defense & Space can perform up to its potential going forward.

The company has recently installed Ted Colbert, the head of Global Services, atop the defense business in a bid to put it back on an even keel. Boeing insiders say if Colbert can accomplish at Defense & Space what he did at Global Services, he would be a candidate to lead the whole company in the future. At the very least, he brings a fresh perspective to a key component of the company’s business mix.

As noted above, Boeing contributes to my think tank.