Cramer's Investing Club: Boeing's messy quarter does not change our long view on the plane maker

Published Wed, Jan 26 20222:29 PM EST

Boeing 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 earnings number looks ugly, but the results include three recorded charges. The largest recorded 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. Lastly, Boing recorded a $220 million inventory impairment in its Global Services segment. Some analysts may call this a "kitchen sink" quarter, with Boeing putting the rest of its bad news out in the open in hopes that the setup for 2022 will be much cleaner. We prefer to take a much harder stance because charges typically happen when management failed to execute. Some positive signs But on a more optimistic note, and what may be more important to the Boeing story—or at least to the 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. 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. That said, we continue to think the company will need to raise cash in the future to pay down debt. If this does happen (and hopefully at a higher stock price), we don't see it as a completely bad thing. 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. But at the same time, we are wary because the news will likely be viewed negatively by the market. 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. 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 because of its large finished goods inventory position, but that could change as production ramps. 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 messy quarter overall 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 3% on an up day for the market. One reason why the stock is trading lower might be because the $4.1 billion of charges underscores the many problems management has had on execution. Despite Boeing's challenges and execution issues, we are sticking by the stock today because the company remains 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 to see if the stock revisits the $193 level, which is where we picked up shares in December in our article here , before adding again. Due to the recent market selloff, so many stocks are significantly down from their highs right now. The market pullback has even brought down the stocks of companies that are of higher quality with better management teams and stronger balance sheets than Boeing. So as much as we want to like Boeing on this dip, we prefer to be more selective with our buying right now. (Jim Cramer's Charitable Trust is long BA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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A Boeing 777X airplane takes off during its first test flight from the company's plant in Everett, Washington, January 25, 2020.

Terray Sylvester | Reuters

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