It’s finally over. On Monday, the International Association of Machinists (IAM) voted 59% in favor to 41% against a new four-year contract for Boeing(NYSE:BA).
Under the terms of the new contract, IAM members will see wages increase by 38% over the next four years, receive higher 401(k) matching funds (but no company pension restoration) and pay lower healthcare premiums. Most importantly, after 54 days on the picket line, the workers will return to work on Wednesday. Boeing can start building aircraft again (specifically the 737, 767 and 777 aircraft, the construction of which was halted during the strike).
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Investors aren’t so lucky. We still have some work to do in calculating the damage done to Boeing stock over the last 52 days of this strike, and we need to take into account the damage that will continue to be done to its financial position in the coming years from Boeing will be inflicted.
We’ll start with what we know for sure, as evidenced by Boeing’s Q3 earnings report, released late last month.
The good news is that while Boeing’s labor strike slowed sales in the quarter, the slowdown only affected the last seventeen days, September 13 through September 30. While commercial aircraft revenues were down 5%, in terms of commercial aircraft delivered, Boeing actually delivered more aircraft in the third quarter of 2024 than in the third quarter of 2023 (116 versus 105). Boeing was also helped by a small percentage increase in sales at its global services unit (2% revenue) and at Boeing Defense (1%).
Although total revenue in the third quarter fell compared to the third quarter of last year, the decline was only 1%, to $17.8 billion.
The bad news is that Boeing’s profits haven’t come so easily. Operating margins at the aerospace giant, which had been negative for years, became even worse in the third quarter and fell to negative 32.3%.
The blame here was distributed unevenly. Global services sector profits actually rose 6% year-on-year to $834 million. But, hurt by allegations of its T-7A training aircraft, MQ-25 naval drone and KC-46A tanker contracts, as well as its Starliner spacecraft, Boeing posted a $2.4 billion operating loss from its defense division (BDS) . Commercial aircraft losses, meanwhile, exceeded $4 billion.
In the end, Boeing lost $6.2 billion, or $9.97 per share.
As explained above, not all of this loss was due to the strike. For example, the losses at BDS had little to do with striking commercial aircraft workers. Still, Boeing highlighted the “consequences of the IAM work stoppage” as the main factor causing the major loss. More than just sales slowed by the work stoppage, Boeing has also charged $3 billion in fees to account for both the costs of a year-long delay in the introduction of its new 777X and the closure of its 767 Freighter line – both took measures to cut costs and save money as a result of the strike.
What does this portend for Boeing’s future?
Boeing’s third-quarter report, which ran from July 1 through September 30, included the results of the first 17 days (about the first third) of the strike. So very roughly, investors can estimate that regardless of the losses Boeing incurred as a result of the strike in the third quarter, the strike-related losses in the fourth quarter will be roughly twice as large.
How big were who lose? If we subtract the $3 billion in costs for the 777X and 767 programs from the total loss of $4 billion in the commercial aircraft division, this implies that the strike cost Boeing $1 billion in the third quarter of the strike lost sales. This further implies that strike-related losses will cost Boeing an additional $2 billion in the fourth quarter.
Looking further, Boeing has burned $10.2 billion in negative free cash flow so far this year. The good news is that this puts the company on track to beat analyst forecasts (as compiled by S&P Global Market Intelligence) for negative free cash flow of $14.1 billion this year. The bad news is that these predictions probably don’t take into account the money burned during the last two-thirds of the strike.
Boeing might eventually catch fire more cash than forecast this year. And Boeing has warned it will continue to burn cash into 2025. Analysts predict negative free cash flow of $3.4 billion in 2025, which won’t turn positive until 2026.
Granted, analysts still see Boeing reporting positive profits under generally accepted accounting principles (GAAP) next year. But as I’ve warned before, Boeing’s debt levels and stock issuance, combined with pay increases for its machinists (and probably others as well), are likely to cut deeply into these profits. Depending on how many shares Boeing ultimately issues and how quickly, earnings per share could be as much as 27.5% lower than analysts currently forecast – just $1.85 per share.
At a share price of around $148, that implies a price-to-earnings ratio of 80.
Looking ahead, new CEO Kelly Ortberg warned that “it will take time to return Boeing to its former legacy.” In addition to getting operators back to work, he says, Boeing will “fundamentally change the culture, stabilize the company and improve program execution while laying the foundation for Boeing’s future.”
Boeing needs to do all this and more before I can recommend the stock as a buy at this price.
Consider the following before buying shares in Boeing:
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Boeing just lost $10 per share – and it wasn’t just because of the strike. originally published by The Motley Fool
