The Long and Short
Boeing’s “kitchen sink” results may smooth the path forward
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
The recent widening in Boeing (BA) spreads following weak first quarter 2022 results presents an attractive entry point to the credit versus the broader segment, as bonds hold long-term value. Sensing the weak operating environment, BA management resorted to a bit of a “kitchen sink” quarter, taking some one-time charges to smooth the path for improved operating results on the near-term horizon. Management maintains its guidance for positive operating cash flow for the 2022 fiscal year. Long-term prospects for Boeing remain favorable with a current backlog of $371 billion as of first quarter end, and a contractual backlog of $348 billion.
Exhibit 1. BA current spreads vs broader Aerospace/Defense peer group
Source: Amherst Pierpont, Bloomberg TRACE/BVAL G-spread indications
BA generated negative headlines which resulted in a sell-off in both equity and debt instruments when the company reported weaker than expected results. First quarter loss per share was $2.06 while revenue of $13.99 billion fell short of consensus expectations for $15.94 billion. Most notably, cash burn in the first quarter 2022 was $3.57 billion versus estimates for $3.23 billion. Operating cash flow was negative $3.22 billion, which fell short of estimates for negative $2.61 billion, but management maintains expectations to turn positive by 2022 year-end.
In first quarter 2022, BA recorded charges on fixed-price defense development programs contributing to a drop in revenue at the defense, space & security segment to $5.48 billion from $7.19 billion in the prior year, which led to a $929 million net loss. BA took a total of $1.27 billion in accounting charges for fixed-price contracts that included the VC-25B, the T-7A, and cost overruns on the presidential aircraft fleet.
In the commercial segment, BA’s revenue dropped to $4.16 billion from $4.27 billion in the prior year period despite an increase in deliveries (95 vs 77), as the impact of the timing of wide-body deliveries was only partially offset by increased 737 deliveries.
Most encouragingly, BA’s revenue from the services segment increased 15% year-over-year to $4.31 billion, with earnings spiking 43% from the prior year period, as management highlighted the improved profit margin on higher commercial volume. Boeing Capital also contributed a modest $36 million loss to earnings from operations.
Exhibit 2. Recent selling in liquid Boeing issues outpace the Index, spreads hit new 12-month highs
Source: Amherst Pierpont, Bloomberg TRACE/BVAL bid spread-to-treasury indications,
LUACOAS: Bloomberg/Barclays IG Corporate Bond Index
BA took a total of $212 million in charges linked to the war in Ukraine related mostly to asset impairments. Business in both Russia and Ukraine has been suspended. Management also ascribed weakness in the first quarter to supply chain disruptions stemming from Covid-19, as well as inflationary pressures and the short labor supply. BA also believes that Covid-19 restrictions have delayed the approval process in China for the 737 MAX, but still expects that deliveries will resume later this calendar year. With regard to the 787, management maintains guidance for resumption of deliveries in the second half of the year, after submitting certification plans with the FAA. 787 abnormal costs for first quarter 2022 were $312 million and are still expected to max out at $2 billion by year-end 2023.
In a review of the results, S&P stated that liquidity remains strong and that their ratings and outlook on Boeing are unaffected by the earnings announcement, but that a move to stable could take longer than anticipated in light of the earnings weakness in the first quarter.
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