Why Boeing Didn’t Disappoint despite Q3 Earnings Miss

On Wednesday, Boeing (BA) delivered mixed third-quarter results. The company’s revenues beat analysts’ expectations. However, Boeing’s earnings missed the estimates. As we expected, the 737 MAX grounding took a toll on the company’s overall financial results.

Boeing delivered 62 commercial planes—a drastic 67% YoY (year-over-year) decline from 190 airplanes shipped in the same quarter last year. As a result, the total revenues fell 21% YoY to $20 billion. The company’s EPS fell 59% to $1.45 in the quarter. Analysts expected revenues of $19.7 billion and an EPS of $2.09.

Investors and analysts expected a dismal performance. Analysts and investors were mainly eager to learn about the 737 MAX’s projected return and the prospects of Boeing’s wide-body aircraft. The company’s management didn’t disappoint analysts or investors.

Boeing reaffirms MAX return in Q4

During the third-quarter earnings release, Boeing reaffirmed that the 737 MAX should return to service in the fourth quarter. However, the company said that the return would be in phases. Several regulatory bodies will conduct an independent safety review. Notably, there are fears that the grounding might drag into 2020 due to a rift between global regulators and leaked internal messages last week.

The 737 MAX’s return is necessary for Boeing’s growth prospects. The model accounts for nearly 70% of the company’s total aircraft shipments. Moreover, the fast-selling jet contributes approximately 30% to Boeing’s overall operating profit.

Also, the MAX grounding is costing Boeing billions of dollars. During the quarter, the company took another $900 million of additional production costs due to MAX’s lowered output. The company reduced MAX’s monthly production by 19% to 42 units due to frozen shipments after the global flying ban in mid-March.

Since mid-March, Boeing has recorded a total of $3.6 billion in incremental production costs. In the second quarter, the company recorded a pre-tax charge of $5.6 billion as estimated compensation costs to MAX customers. So far, the combined cost of the MAX grounding has reached $9.2 billion. The company consumed $2.9 billion of free cash flow during the third quarter. Boeing continues to build the MAX aircraft.

The company reaffirming MAX’s return in the fourth quarter boosted investors’ confidence in the stock. Notably, the stock closed trade 1% higher on Wednesday despite missing the earnings expectations. Hopes about the MAX return boosted aircraft part suppliers’ stocks. Spirit AeroSystems (SPR) and Triumph Group (TGI) shares gained 2.7% and 2.8%, respectively, on Wednesday.

Is everything good at Boeing?

Although investors celebrated the reaffirmation of MAX’s return in the fourth quarter, Boeing has to worry about its wide-body aircraft. On Wednesday, the company announced that it will lower the monthly output of 787 Dreamliners next year due to a declining order backlog. Boeing plans to reduce the production to 12 units per month by the end of next year from the current level of 14 units.

In a report on October 9, Reuters stated that the demands for the long-haul larger plane are softening for multiple reasons. The report cited rising trade tensions and global economic slowdown concerns as the main reasons behind weakening demand. Reuters also said that smaller planes’ enhanced capabilities impact the demand for larger aircraft.

As of September 30, Boeing has an order backlog of 556 planes for its 787 Dreamliners. Earlier this month, Russia-based Aeroflot canceled all of its orders for the 22 Dreamliner jet. The canceled deal is worth $5.5 billion at the list price.

Boeing faces continued delays in launching its most ambitious ultra-long-range wide-body 777X aircraft. The company shifted the debut date to early 2021 from late 2020.

Boeing’s 777X program has faced multiple delays due to several factors. Operational issues with the aircraft’s GE9X engines impacted the program. The GE9X engine, made by General Electric (GE), is a crucial part of the 777X program due to its fuel-efficiency and less noise. The 777X program received another blow last month. The program failed a heavy-load test conducted by the American regulatory body.

What’s ahead for the stock?

We don’t think that MAX’s return will solve Boeing’s problems. The company needs to finish its projects in time to avoid cost overruns. Also, delays in launching new planes might make customers choose other planes. Even though the MAX might return to the skies by the end of 2019, Boeing stock could remain under pressure due to uncertainty about its wide-body aircraft.

Once the Dow Jones 30 Component’s top performer, Boeing stock has fallen significantly since the Ethiopian Airlines crash on March 10. The stock has eroded to 5.5% YTD (year-to-date) as of Wednesday from 31% as of March 8. The stock has underperformed US indexes and the iShares U.S. Aerospace & Defense ETF (ITA). The Dow Jones, the S&P 500, and ITA have gained 15%, 19.8%, and 25.5%, respectively, YTD.