Stock of the week - Boeing (28.04.2022)

• Boeing slumped 7.5% after Q1 results

• Sales and earnings missed expectations significantly

• 24% drop in cash and cash equivalents during the quarter

• Company records $1 billion charge on defense contract as inflation bites in

• 777X production paused through 2023, deliveries to begin in 2025

• Boeing to become smaller than Airbus?

• Shares dipped below downward channel

Share price of Boeing (BA.US) plugned 7.5%, making the stock the worst performing Dow Jones member yesterday. This was the biggest single-day drop in Boeing's share price in almost two years. Company's sales and profit missed market expectations significantly. While the company said that it expects to generate a positive free cash flow on full-year basis, it did little to ease investors' concerns. Let's take a closer look at the company and its recent earnings release.

Q1 sales miss estimates by huge margin

Investors were expecting another poor quarterly release from Boeing amid supply chain constraints, spiking inflation and downbeat global economic outcome. Actual results, however, turned out to be much weaker than even already-poor estimates. Company reported a 8.1% YoY drop in total revenue with all business segments missing revenue estimates. Situation look similar in case of operating profit. However, when it comes to operating profit, the Global Services segment managed to beat expectations. Rate of operating and free cash burn were also weaker than expected. Company also reported a big drop in cash and cash equivalents during the quarter.

Revenue: $14.0 billion vs $15.94 billion expected

• Commercial Airplanes revenue: $4.16 billion vs $4.78 billion expected
• Defense, Space & Security revenue: $5.48 billion vs $6.84 billion expected
• Global Services revenue: $4.31 billion vs $4.19 billion expected
• Boeing Capital revenue: $46 million vs $59.8 million

Operating profit: -$1.19 billion vs $0.73 billion expected

• Commercial Airplanes operating profit: -$859 million vs -$201.5 million expected
• Defense, Space & Security operating profit: -$929 million vs +$405 million expected
• Global Services operating profit: $632 million vs $564.6 million expected
• Boeing Capital: -$36 million vs $15.4 million expected

EPS and cash position

• Earnings per share: -$2.06 vs +$0.22 expected
• Operating Cash Flow: -$3.22 billion vs -$2.61 billion expected
• Free Cash Flow: -$3.57 billion vs -$3.23 billion expected
• Cash and cash equivalents: $12.3 billion (-24%)

Inflation bites in, 777X jetliner production paused through 2023

Headline results of Boeing in Q1 2022 didn't give reasons for optimism and details are not too positive either. Boeing said that operating profit at its Defense, Space & Security segment was impacted by a $1 billion charge the company had to take on two defense contracts. Those contracts were fixed-price contracts and therefore it was Boeing who was taking risk of inflation. Company also had to take a $212 million charge relating to the Russia-Ukraine war as it halted titanium imports from Russia and stopped servicing Russian planes.

Boeing's executives tried to strike a positive tone during the earnings call. They said that it has over 400 completed planes in storage as a result of 737 MAX grounding and resulting tighter regulatory scrutiny of its 787 and 777X models. Company expects to start delivering those by the end of 2023 which would provide Boeing with a cash boost. Nevertheless, the planemaker made a decision to pause production of 777X jets through 2023, pushing back first deliveries of the model to 2025.

Boeing to become smaller than Airbus?

Share prices of Boeing and its European rival Airbus were moving in tandem during the Covid panic in 2020 and post-pandemic recovery in the second half of 2020. However, performance of both stocks decoupled in mid-2021 as Boeing shares started to trade within a downward channel and Airbus launched a sideways trend. As a result, there is a growing risk that Boeing's market capitalization will drop below market capitalization of Airbus for the first time in history. While this does not have any direct impact on the stock price or business, it is a sign that current struggles at the US aviation company are taking a toll on its position within the industry.

Boeing's market cap is almost on par with Airbus. Source: Bloomberg, XTB

A look at the chart

Taking a look at Boeing (BA.US) chart at D1 interval, we can see that the stock has been trading in a downward channel since mid-2021. A disappointing earnings release triggered a share price plunge, pushing the stock below the lower limit of the channel. Drop was halted at the $144.00 support zone and share price began to regain ground. However, it failed to break back above the lower limit of the channel. Stock is trading 1% higher in pre-market today, suggesting that bulls have not given up yet and another attempt of returning into the range of the channel may be made today. If this is the case, investors should focus on the $172.50 swing area as the first resistance zone to watch.

Source: xStation5