Boeing Experiences Significant Dollar Loss per Share, and the Work Stoppage Isn't Entirely to Blame
The ordeal has concluded. On a Monday poll, with a 59% favorable vote versus 41% against, the International Association of Machinists (IAM) agreed to a fresh four-year agreement from Boeing (BA -0.19%).
The agreement stipulates that IAM members will witness a 38% salary increase over the next four years, enjoy augmented 401(k) matching funds (but no reinstatement of the company pension), and pay reduced healthcare premiums. Following a 54-day stint on the picket line, workers will commence their return to work on Wednesday. Boeing can resume manufacturing aircraft, specifically the 737, 767, and 777 models, which were temporarily halted during the strike.
Investors aren't exactly thriving. We've got some work cut out for us in ascertaining the toll inflicted on Boeing stock during the past 52-day duration of the strike, as well as considering the damage that will be prolonged to Boeing's longer-term financials.
Boeing's Q3 earnings
Let's start with the known facts, as represented in Boeing's Q3 earnings report, published recently.
The silver lining is that although Boeing's labor strike hampered sales in the quarter, the slowdown only impacted the last 17 days of September. Commercial airplane revenue diminished by 5%, but Boeing managed to deliver more airplanes in Q3 2024 than in Q3 2023 (116 versus 105). Additionally, Boeing recorded small percentage increases in revenue at its global services unit (revenue up 2%) and at Boeing defense (up 1%).
Consequently, while total Q3 revenue decreased in comparison to last year's Q3, the decline was just 1%, reaching $17.8 billion.
The downside is that Boeing's profits didn't fare so well. Quarterly operating margins at the aerospace titan, already dwindling for years, plummeted even further in Q3, hitting negative 32.3%.
The responsibility was not evenly allocated. Global services profits actually improved by 6% year on year, reaching $834 million. However, charges on T-7A training jet, MQ-25 naval drone, and KC-46A refueling tanker contracts, as well as on Starliner spacecraft, contributed to a $2.4 billion operating loss from Boeing defense division (BDS). Losses in the commercial airplane sector surpassed $4 billion.
On the balance sheet, Boeing posted a loss of $6.2 billion, or $9.97 per share.
What harm did the strike inflict?
As previously disclosed, not all of this loss can be attributed to the strike. Charges related to BDS, for example, bore little resemblance to the strike involving commercial airplane workers. Nevertheless, Boeing singled out the "effects of the IAM work stoppage" as the primary catalyst for its substantial loss. Apart from sales delayed due to the work stoppage, Boeing also recorded $3 billion worth of charges to account for both the delay in introducing its new 777X and the shutdown of its 767 Freighter line -- moves adopted to curtail costs and preserve cash due to the strike.
In what way might this bode for Boeing's future?
The Q3 report, spanning July 1 through September 30, included results from the first 17 days (approximately the first third) of the strike. Therefore, investors can roughly estimate that whatever losses Boeing sustained due to the strike in Q3, strike-related losses in Q4 will roughly double in size.
What was the magnitude of those losses? If we subtract the $3 billion in charges for the 777X and 767 projects from the $4 billion total loss at the commercial airplanes division, this suggests that the strike cost Boeing $1 billion in Q3 due to sales lost during the strike. This also implies that strike-related losses will cost Boeing another $2 billion in Q4.
Looking further ahead, Boeing has consumed $10.2 billion in negative free cash flow thus far this year. The good news is that this puts the company on track to surpass analyst estimates (by S&P Global Market Intelligence) of $14.1 billion in negative free cash flow this year. The bad news is that these forecasts probably don't account for cash burned during the latter stages of the strike.
Potentially, Boeing could still consume more cash than projected this year. And Boeing has indicated that it will continue to burn cash throughout 2025 as well. Analysts anticipate negative free cash flow of $3.4 billion in 2025, with free cash flow becoming positive only in 2026.
Is Boeing stock a viable investment?
While analysts still predict Boeing reporting positive generally accepted accounting principles (GAAP) profits next year, I've cautioned before that debt costs and share issuances by Boeing, coupled with pay raises for its machinists (and likely others), are likely to undermine these profits significantly. Depending on the number of shares Boeing ends up issuing and the pace at which it does so, per-share profits could dwindle as much as 27.5% compared to current analyst forecasts -- potentially dropping down to $1.85 per share.
At a share price of around $148, this implies a forward P/E ratio of 80.
Moving forward, new CEO Kelly Ortberg highlighted that "restoring Boeing to its former stature will take time." Beyond just getting the machinists back to work, he emphasized the need to "transform the culture, stabilize the business, and improve program execution, while establishing the foundation for Boeing's future."
Boeing needs to accomplish all these tasks and beyond to warrant my endorsement of the stock as a "purchase" option at this price point.
Following the 54-day strike, investors will need to closely monitor how Boeing's financials are affected in the long term. The labor dispute significantly impacted Boeing's Q3 earnings, with the company reporting a loss of $6.2 billion and negative operating margins of -32.3%. While the exact impact of the strike on Boeing's stock and longer-term financials is yet to be fully ascertained, investing in finance and considering Boeing's future prospects could require careful analysis and strategic decision-making.
With the agreement in place, Boeing's investors should also keep an eye on the company's financial strategy, including its plans for debt management and potential share issuances, as these factors could significantly influence the company's profitability and share price in the coming years.
