The dual crises of the 737 MAX grounding and the COVID-19 pandemic have weighed heavily on Boeing's (NYSE: BA) business since early 2019. The aerospace giant posted big losses in 2019 and 2020 -- particularly last year -- and burned a stunning $24 billion of cash over the two years combined.
Boeing took a step in the right direction last quarter, reporting its first quarterly profit in nearly two years. That said, the company's unexpected return to profitability doesn't mean investors should expect smooth sailing.
A better-than-expected quarter
Boeing generated $17 billion of revenue in the second quarter. While this is a far cry from the $24.3 billion of revenue it brought in during Q2 2018 -- before the 737 MAX grounding and the pandemic -- this represented a 44% year-over-year increase and a 12% sequential revenue improvement.
Results improved both sequentially and year over year for all three of Boeing's business segments. The commercial airplanes division delivered 79 aircraft last quarter: up from just 20 during the depths of the pandemic a year ago. Additionally, its deliveries were more evenly balanced between the 737 MAX and wide-body jets than in the first quarter. As a result, commercial airplanes revenue reached $6 billion: up from $4.3 billion in the prior quarter and $1.6 billion in Q2 2020.
Image source: Boeing.
In the defense segment, revenue rose just slightly year over year (and decreased sequentially) to $6.9 billion. However, segment margin expanded dramatically, reaching an impressive 13.9%.
Finally, Boeing's services business generated nearly $4.1 billion of revenue, up from $3.7 billion a quarter earlier and $3.5 billion in the second quarter of 2019. That segment also posted a solid operating margin of 13.1%.
The double-digit margins Boeing earned in its defense and services units helped offset continued losses in the commercial airplanes business. This enabled the company to post a GAAP profit of $1.00 per share and adjusted earnings per share of $0.40. On average, analysts had been expecting a loss of $0.72 per share.
Cash flow remains negative
Despite posting an accounting profit last quarter, cash flow remained negative. Boeing burned $705 million of cash in the second quarter.
This still marked a huge improvement over the first quarter, when the company burned through $3.7 billion. And in 2020, Boeing averaged nearly $5 billion of quarterly cash burn. Boeing benefited from a better mix of wide-body deliveries, along with deposits associated with some of the big orders it won during the quarter. The cash impact of customer concession payments related to the 737 MAX grounding also decreased to $366 million from nearly $1.2 billion a quarter earlier.
Image source: Boeing.
Getting closer to cash breakeven is a positive step, and management's current goal of generating positive free cash flow next year seems feasible. However, in the near term, management warned of "continued variability in cash flow quarter over quarter due to timing of deliveries, as well as receipts and expenditures, such as expected cash tax benefits and MAX customer settlement payments."
A long slog ahead
While Boeing may start generating free cash flow again next year, it will need to apply all of that cash to debt reduction for the foreseeable future. Boeing ended last quarter with $63.6 billion of debt, compared to just $13.8 billion at the beginning of 2019.
Furthermore, Boeing's order backlog for commercial jets has decreased significantly over the past two years. Airbus made substantial share gains in the narrow-body market while the 737 MAX was grounded. Moreover, Boeing's few noteworthy order wins over the past year have been 737 MAX deals with big airlines that can command substantial discounts.
Meanwhile, wide-body demand will remain depressed for the foreseeable future due to a slow recovery in long-haul travel and increasing usage of narrow-body jets like the A321LR on transatlantic routes. The freighter market is the only bright spot, but Boeing will face more competition there in the future, due to Airbus' recent decision to build a freighter version of its state-of-the-art A350.
Boeing has made good progress on cutting costs to match lower demand. Nevertheless, it's unlikely to match its pre-2019 earnings power anytime this decade. That makes Boeing stock fairly unattractive despite its Q2 earnings beat.
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