Boeing (BA) reported an ugly quarter before the opening bell Wednesday, and the stock was sinking nearly 9% as a result. 

Companywide Q1 results

Revenue of $13.99 billion — down 8% year over year — missed expectations of $15.69 billion while a core loss of $2.75 per share missed expectations for a $0.26 per share loss.

On the call, management cited headwinds resulting from the war in Ukraine, which resulted in a $212 million pre-tax charge, inflation and a greater than expected impact from Covid in at least the first half of the quarter. 

As for cash flow, an operating outflow of $3.22 billion was greater than expectations for a $2.5 billion outflow, while a free cash outflow of $3.57 billion was greater than expectations for a $2.96 billion outflow. That said, improving cash flow remains the team’s core financial focus — and despite the greater than expected outflows in the first quarter, management reiterated that the company remains “on track to generate positive cash flow for 2022” before they see what they call “meaningful improvement” next year. The key drivers of this improvements will be higher 737 and 787 delivery volumes.

Balance sheet

Taking a look at the balance sheet, management was sitting on cash and marketable securities of $12.3 billion at the end of the first quarter, with access to $14.7 billion in undrawn bank credit facilities. On the other side of the balance sheet, the company noted that its $57.7 billion of debt was down marginally from the end of 2021.

Importantly, when asked on the call about any need to raise cash, management said they feel “very comfortable” with their liquidity levels and see no need in the near- or mid-term to do an equity offer nor take on additional debt. Again, that goes back to Boeing reiterating expectations for improving cash flow throughout the year. 

Q1 Segment results

Commercial Airplanes

• Revenue: $4.16 billion, down 3% year over year, vs. $4.97 billion expected

• Operating margin: minus 20.6%

• Loss from operations $859 million vs. $487 million loss expected

• Deliveries: 95, up 18 versus year ago period

• Backlog: nearly 4,200 airplanes valued at $291 billion 

Sales declined annually as an increase in 737 deliveries was not enough to offset a negative impact from the timing of wide-body deliveries. On the release, management noted that 737 production continues to improve, and it’s expected to increase to a 31-plane per month rate in the second quarter.

As for the 787, the team noted that the rework is complete on initial airplanes and they are working closely with the Federal Aviation Administration on certification so that they can resume deliveries. That said, as deliveries have not resumed, the program is still producing at a very slow pace with plans to inch up to five planes per month “over time,” the team added. Looking ahead, management believes the troubles plaguing the 787 will result in roughly $2 billion of abnormal costs — $312 million of which were recorded in the first quarter with the bulk incurred by the end of 2023.

While the 777-8 Freighter was launched in the first quarter with an order from Qatar Airways, initial deliveries of the 777-9 are not expected to begin until 2025. That’s when the program is expected to meet certification requirements. This is a material delay versus the company’s previous timeline for the end of next year. As a result of the delay, management is adjusting production rates, which will result in roughly $1.5 billion of costs starting in the current quarter and continuing until production resumes following a pause throughout 2023.

On a more positive note, management did call out a robust recovery underway for domestic travel, a message echoed by airline CEOs in recent weeks, adding that even long-haul traffic is beginning to recover. China remains the exception due to Covid restraints.

Defense, Space & Security

• Revenue: $5.5 billion, down 24% year over year, vs. $6.72 billion expected

• Operating margin: minus 16.9%, down from plus 5.6% in the year-ago period

• Loss from operations $929 million vs. a profit of $565 million expected

• Backlog: $60 billion with 33% related to customer orders outside the U.S.

Driving the revenue decline and operating margin contraction in this segment was lower volume that was compounded by fixed-price charges on development programs.

Global Services

• Revenue: $4.31 billion, up 15% year over year, vs. $4.4 billion expected

• Operating margin: plus 14.6%, up 280 basis points year over year

• Earnings from operations: $632 million vs. $536 million expected

Driving the topline growth and operating margin expansion in this segment was higher commercial volume and a favorable mix. On release, management noted that commercial services revenue is now tracking at roughly 90% of pre-pandemic levels and that the “outlook for government services remains stable.

Bottom line

These were not the numbers that we were looking for from Boeing. We were hoping that Boeing would surprise analysts to the upside, hoping that may turn the stock north. We’re downright disappointed, especially following bad news in the fourth quarter. 

Commercial air travel is picking up and management continues to expect passenger air traffic to reach pre-Covid pandemic 2019 levels in the 2023 to 2024 timeframe. However, inflation, supply chain disruptions, China’s zero-Covid policy of mass testing and lockdowns as well as Russia’s war in Ukraine remain key near-term overhangs. In addition to the headline misses, Boeing’s cash flow was below expectations and delays in commercial airplane programs are resulting in what they called “abnormal costs” that are becoming far too normal for our liking. 

With that in mind, management continues to target positive free cash flows for the full year. The fact that Boeing operates in a duopoly market with Europe’s Airbus does help mitigate some of the downside, so as long as they can provide positive progress updates on the re-certification of key programs and on delivery numbers.

We're not in the business of owning money-losing companies. Why have we stayed in Boeing and why are we continuing to stay here after this horrendous print?

While execution thus far has been horrendous, the reality is that the world needs more planes and Boeing will ultimately be one of the two companies providing them. As wrong as it was to not sell the stock when it was higher, we believe it will prove doubly wrong to dump the rest here, right when cash flow — the key metric investors are focused on — is about to turn around. We therefore will put this stock in the penalty box, meaning we won't be buying any more even at much lower prices, until the management gets fired, or there's a substantial improvement from today.