The Boeing Paradox: Big Losses, Oodles of Cash Flow

Boeing has only reported GAAP net income in three of the past 17 quarters. Over the past four quarters, losses totaled more than $4 billion, according to Bloomberg. Free cash flow, on the other hand, has totaled almost $8 billion over the past four quarters. What gives?

Accrual-based accounting is the answer. GAAP accounting tries to match revenue and expenses in the period in which they occur. That doesn’t always line up with how the cash flows.

The simplest example might be a car warranty. Most cars will have something break at some point. Everyone knows it. So

Tesla

(TSLA) will recognize an expense for warranty repairs every time it sells a car.

Tesla

hasn’t spent any cash when the expense occurs. The cash outflow comes when something covered under a warranty actually breaks. That cash payment never hits the income statement. The expense has already occurred. The expense to cover warranties was matched to the car sale.

For Boeing, the difference between earnings and free cash flow is almost $13 billion over the past four quarters. It isn’t from warranty expenses. The biggest contributor to the difference is $3.2 billion in progress payments. This is, essentially, cash in the door from customers that is due to Boeing as it builds the planes. In this instance, cash comes in the door before Beoing recognizes revenue from selling a plane.

Inventory is another big source of cash flow. Boeing is still working through its undelivered MAX jets. Building inventory requires cash. Selling from inventory generates cash.

Boeing’s inventory balance at the end of the second quarter was $78 billion. The inventory balance in 2019, before the MAX grounding or the pandemic, was $65 billion. There is more cash to be generated from returning inventories to normal levels.

Boeing also tends to have more accounts payable than accounts receivable. That dynamic generates cash flow when sales are growing, as they are now coming out of the Covid-19 pandemic. Customers pay Boeing a little faster than it pays suppliers.

Inventory, working capital items, and the way customers fund building their planes account for the bulk of the net income-cash flow paradox.

Whether investors should pay more attention to cash flow or net income is debatable. Both metrics have merit. For now, after years of volatility, Wall Street is focused on cash flow.

Cash flow even generated an upgrade. BofA Securities analyst Ron Epstein upgraded shares of Boeing to Buy from Hold on Thursday. His price target went to $300 a share from $225.

“We are currently in the midst of the post-COVID commercial recovery with passenger demand emerging back to pre-pandemic level,” wrote Epstein in a Thursday report. “As such, we are raising our [price target] on improved free cash flow expectations.”

With the upgrade, 67% of analysts covering Boeing rate the stock a Buy, according to FactSet. The average Buy-rating ratio for stocks in the

S&P 500
is about 55%. The average analyst price target is about $247 a share.

Theoretically, in the very long run, cash and net income should converge. The crazy gap these days is just another reflection of how odd things have been in the commercial aerospace business over the past few years.

Boeing stock is 2.1% following the upgrade. The S&P 500 and

Dow Jones Industrial Average
are up 0.6% and 0.2%, respectively.

Write to Al Root at [email protected]