I've Avoided This Stock for 40 Years. Today, I'm Finally Buying It.
Here's why this longtime bear is at last climbing aboard and my initial price target for the shares.
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Long-beleaguered commercial aircraft manufacturer and defense contractor Boeing (BA) released its first-quarter financial results on Wednesday morning. No, I am not in Boeing, nor have I really ever been for anything more than a trade for decades. I have told readers several times in the past what an Air Force Staff Sergeant told me about Boeing roughly 40 ago as we were headed down to Panama.
He was the load master of the C-130 my company had hitched a ride on. His opinion of the quality of the work done by Boeing was not high back then. The company appeared to have had a cultural problem that apparently persisted for decades. For 40 years?
What that long-retired Air Force NCO told me decades ago kept me out of this stock and out of trouble. Just an impression made on a young man that stuck. Back to the present.
For the period reported, Boeing posted an adjusted loss of $0.20 per share (GAAP loss per share: $0.11) on revenue of $22.217 billion. Incredibly, while the revenue generated was good for annual growth of 13.8%, those earnings numbers, which look awful, actually beat Wall Street expectations, quite easily.
Boeing President and CEO Kelly Ortberg commented in the press release:
"We're building on our momentum with a strong start to the year and growing record-breaking backlog across our business, while supporting our customers with inspiring missions like Artemis II. With a continued focus on safety and quality, we're delivering high-quality commercial and defense products and services, while increasing production to uphold our customer commitments and get back to the iconic global aerospace company that leads our industry."
While performance is still tough to look at and corporate execution has been embarrassing, Ortberg may have a point. The company's total order backlog grew, during the quarter, to a record $695 billion, which includes over 6,100 commercial airplanes.
Operations
As sales grew 13.8% to $22.217 billion for the quarter, the total cost of those sales grew 15.2% to $19.671 billion. That left a gross profit of $2.546 billion (+5.3%) as Boeing's gross margin narrowed to 11.5% from 12.4%.
After accounting for all operating expenses, the company's GAAP operating income printed at $448 million (-2.8%) as operating margin dropped to 2% from 2.4%. Once interest, other income & expenses and taxes are factored for, the GAAP net loss landed at $90 million, versus -$123 million for the year-ago comp. This works out to a GAAP loss of $0.11 per share, versus a loss of $0.16.
Once adjustments are made for mostly pension-related issues, operating earnings drop to $293 million and operating margin drops to 1.3%. This also takes the loss down to $0.20 per share, which compares to -$0.49 for the same quarter last year.
Segment Performance
-- Commercial Airplanes generated revenue of $9.203 billion (+13%), producing operating income of -$563 million on an operating margin of -6.1%.
-- Defense, Space & Security generated revenue of $7.599 billion (+21%), producing operating income of $233 million on an operating margin of 3.1%.
-- Global Services generated revenue of $5.37 billion (+6%), producing operating income of $971 million on an operating margin of 18.1%.
Fundamentals
For the period reported, Boeing generated operating cash flow of $179 million. Tack on capex spending of $1.275 billion and "free" cash flow printed at -$1.454 billion. Boeing cannot return capital to shareholders for obvious reasons.
Turning to the balance sheet, Boeing ended the quarter with a cash position of $20.905 billion and inventories of $87.225 billion. That put current assets at $124.141 billion. Current liabilities add up to $105.547 billion, including "advances and progress" billings of $62.591 billion. I see that as deferred revenue, which is not a true financial obligation.
These numbers place the headline current and quick ratios at 1.18 and 0.35, respectively. Once adjusted for those deferred revenues, these ratios work out to 2.48 and 1.16, respectively. This is more than respectable.
Total assets amount to $164.787 billion, including goodwill and intangibles of $19.15 billion. In percentage terms, that's fine. Total liabilities less equity comes to $158.8 billion, including long-term debt of $44.354 billion. That's a lot of debt for a firm that is not profitable and having trouble generating positive cash flows to have to service. However, I do not see this as an overtly awful balance sheet, just one with some problems. Positive cash flows would go a long way here.
My Opinion
Boeing does have a huge order backlog. Now, if those aircraft can be delivered profitably, that would be interesting. The company has reiterated its goal of generating positive free cash flow going forward. They did infer enough positives Wednesday morning to produce a rally.
Is it time to climb onboard?
It is difficult to tell if BA shares are building a Cup pattern with a $247 pivot, or a Cup-with-Handle pattern with a pivot that will likely end up close to $230. Either way, this is a bullish chart.
The 50-day simple moving average (SMA) crossed below the 200-day SMA, but with the 200-day line rising ever so slightly. That diminishes the algorithmic impact of the "death cross." The stock is holding its ground above those two lines. That's what portfolio managers are seeing right now.
Relative Strength is healthy and improving. The daily moving average convergence divergence (MACD) is set up quite bullishly as well. All three components of that indicator are in positive territory with the 12-day exponential moving average (EMA) running above the 26-day EMA.
I can't believe I am going to say this, but I am going to initiate BA to the new Sarge-folio this afternoon after this piece goes public. My initial target price will be $276.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
