Boeing (BA) reported weaker-than-expected fourth-quarter results Wednesday morning. 

Revenues fell 3% YoY to $14.793 billion and missed the FactSet consensus estimate of $16.542 billion. The company also posted an adjusted loss per share of $7.69 compared to estimates of a $0.36 loss. That EPS loss is not a typo, and was very unexpected and disappointing. The reason for such wide loss was the inclusion of three charges (think of them as fines/ fees that company had to pay). The largest charge was a $3.5 billion pretax non-cash charge on the 787 program, which is producing aircrafts at a very low rate and is expected to do so for the foreseeable future until the FAA approves it for deliveries. Boeing's Defense, Space, and Security business also recorded a $402 million pretax charge on the KC-46A Tanker program. Last was a $220 million inventory impairment in its Global Services segment. 

The Bright Spots

On a more optimistic note and what may be the most important to Boeing' stock, the company significantly outperformed across its key cash flow metrics. 

Operating cash flow was a positive $716 million when analysts were expecting a negative $87 million result. Boeing also generated $484 million of free cash flow in the quarter, a big difference compared to estimates of a loss of $112 million and the $507 million free cash flow burn one quarter ago.

Although first quarter 2022 free cash flow is expected to be similar to the usage the company saw in the first quarter of 2021 (in the few billions), management expressed confidence in free cash improving in the second quarter and "meaningfully" accelerating in the back half of the year as key delivery milestones are met. This guide should provide some reassurance that Boeing will be free cash flow positive this year. Looking out further to the future, management expects 2023 free cash flow to be materially higher than 2022. 

This was the most important point that allowed us to overlook the earnings misses. As discussed in our valuation model for Boeing here, 2022 being an inflection point in terms of free cash flow is the assumption that we make to arrive at our price target of $270 for this stock in 2022.

Balance sheet is improving

Turning to the balance sheet, Boeing ended the quarter with $8.0 billion in cash and $8.2 billion in marketable securities for a total balance of $16.2 billion. That's down from $20.0 billion in the third quarter, primarily driven by debt repayment. Boeing ended the quarter with $58.1 billion of debt, down from $62.4 billion last quarter. 

We are encouraged by the progress made on the balance sheet this past quarter and how free cash flow is expected to inflect to positive territory in 2022. Also, the sooner Boeing fixes up its balance sheet, the sooner the company can go back to paying a dividend, which is something that would bring new investors back to the stock. 

Breaking down the business segments

Commercial Airplanes

• Revenue was flat YoY 24% at $4.750 billion, missing estimates of $5.581 billion. 

• Driving the improved YoY results were higher 737 deliveries, partially offset by lower wide-body deliveries and a less favorable mix.

• The segment reported a loss of operations of $4.454 billion but remember there was a $4.8 billion charge recorded.

• Boeing's Commercial Airplanes backlog ended the quarter valued at $297 billion, up $7 billion from the end of the third quarter. One big reason why Boeing's customers are ordering new planes is to reduce carbon emissions and increase operating efficiency. Boeing said its new airplanes are as much as 25% to 40% more fuel efficient than older models. This confirms our investment thesis.

• Boeing reiterated its current 737 production target of 26 per month, progressing to 31 per month in early 2022. Supply constraints have not impacted Boeing as much as the rest of the industry.

• However, rework on the 787 is still needed and management continues to work with the FAA on the required actions to resume deliveries. There is still no timetable of when deliveries restart. 

Defense, Space & Security

• Revenue declined 14% YoY to $5.862 billion, badly missing estimates of $6.8 billion. 

• The segment reported a loss from operations of $255 million, which includes the $402 million pretax charge mentioned above, versus estimates of a $688 million profit. 

• The segment's backlog now sits at $60 billion, up from $58 billion last quarter. Approximately 33% of the backlog represents orders from customers outside the United States.

Global Services

• Revenue increased 15% YoY to $4.291 billion, beating estimates of $4.086 billion as the business continues to recover alongside the rest of the aviation industry. According to management, U.S. domestic traffic has recovered 94% of pre-COVID levels in November, though the spread of the omicron variant will likely impact the recovery through February. International traffic improved through the year from more than 85% below 2019 levels to 60% at year end.

• Earnings from operations of $401 million missed estimates of $529 million. But remember there was a $220 million inventory impairment charge. 

On China, management said the country is preparing for the MAX to return to service, and a plan is in place that will allow for deliveries to begin as soon as the first quarter. Remember, China reauthorized the 737 MAX to fly back in December, but commercial flights have yet to be resumed.

Our take

It was an unexpectedly bad quarter for Boeing, but one that was salvaged by the better-than-expected free cash flow performance. Usually, Boeing's stock trades higher when free cash flow outperforms, but that wasn't the case Wednesday, as shares fell about 5%. It's clear the reason was the unexpected $4.1 billion of charges. However, we're willing to give CEO Dave Calhoun and management the benefit of the doubt, that these charges were "investments" to fix their current problems (particularly with the B787). We continue to believe that Boeing is a great way to play the ongoing recovery in air travel and the need for airlines to expand capacity and modernize their fleets to more fuel-efficient jets. 

At the same time, we would not buy this dip just yet and we will wait until the stock revisits the $180-$190 levels.