Boeing Stock: Buy The Rumor, Sell The Fact (NYSE:BA)

Jet maker Boeing (NYSE:BA) will be reporting its fourth quarter and full year earnings on the 25th of January before the opening bell. The company is currently facing a challenging environment with demand for commercial aircraft being high, but supply chain disruptions provide a challenging backdrop to capitalize on this demand strength to full potential while the US aerospace giant is also facing cost overruns on fixed cost development programs.

As part of this report, I will be estimating the Boeing Commercial Airplanes revenues based on the delivery data for the fourth quarter accompanied by estimates for Boeing Defense, Space & Security, Boeing Capital Corporation, and Boeing Global Services.

What Analysts Expect

So, let’s first have a look at what analysts are expecting. For the fourth quarter, analysts are expecting $19.88 billion in revenues, marking a 34% increase in revenues and earnings per share of $0.29. The whisper numbers are $20 billion in revenue and earnings per share of $0.56.

Boeing Commercial Airplanes: Where The Growth Is

Boeing Commercial Airplanes – BCA – is no doubt the area where Boeing can derive a lot of growth. The Boeing 737 MAX is back internationally while demand for the jet is high. While supply chain issues are significantly limiting the ability for Boeing to increase production, the program is performing significantly better year-over-year and pricing of the jet has also recovered strongly.

Another growth driver for Boeing is the return of the Boeing 787 program, which from a cash perspective is still a big deal for Boeing. With the delivery volumes and aircraft values in mind, I would expect $9.5 billion in revenues for BCA.

I expect R&D in the $400 million to $450 million range, up to $440 million in abnormal production costs, and SG&A in the range of $815 million. All combined, I would expect BCA to book a Q4 loss of $450 million to $550 million, driven by abnormal production costs.

Boeing Defense: The Ugly Duckling

Boeing Defense has certainly been the ugly duckling for Boeing in 2022 raking in billions in losses suffered on fixed cost development programs which are now biting the company back as costs are rising due to higher labor costs and raw material costs.

The good thing for the segment is that Boeing has de-risked significantly, so chances of significant cost growth beyond this point should be somewhat limited, though with Boeing’s non-performance for the segment, it cannot be completely excluded. Overall, I’m expecting $5.565 billion to $6 billion in revenues and while the costs for the segment are high, I want to see 10% margins.

Boeing Services: Consistency Is Key

Years ago, Boeing started expanding its services offering to increase revenue streams from in-service aircraft and while the pandemic did significantly reduce the services revenue streams temporarily, we now see the segment is back in full strength driven by high services demand related to increased flight activity and freighter conversion programs. I’m looking for revenues of $4.2 billion to $4.5 billion, with margins in the 15%-16.5% range.

My Expectations For Boeing

Putting everything together, I get to three revenue points, namely $19.315 billion, $19.8 billion, and $20.05 billion. The high side of that range more or less coincides with the consensus revenue estimates.

The table above shows how various scenarios would affect the core earnings per share for Boeing. What we see is that estimates vary from an 8 cent per share loss to a 23 cent per share profit. Maybe, I am missing something here but nothing seems to be point at the consensus numbers that analysts are expecting. So, it will be extremely interesting to see what Boeing actually ends up reporting.

Either way, while my figures eventually might be off the main assumptions I have made are ones that I think are reasonable and these assumptions include:

• Continues strength in services volumes and margins.
• Significant uptick in Boeing Commercial Airplanes Revenues.
• Continued elevated abnormal costs for Boeing Commercial Airplanes.

The reason for me to provide a wide range of scenarios is also to show that even if you are able to nail revenues quite well, which our model does relatively often, the way different assumptions even well-reasoned ones propagate through the system results to widely varying outcomes. I believe it should serve as a reminder that people who think they can capture the performance of companies as complex as Boeing in a few lines or in the case of authors make themselves aerospace experts from one day to the next are really just fooling themselves and all readers.

Conclusion: Buy The Rumor, Sell The Fact Event?

While I do believe we will see significant improvement in results for Boeing. One concern that starts boiling up is that this could very well become a buy the rumor, sell the fact type of event. Boeing already has shared it expects $2.5 billion in free cash flow for the fourth quarter, and I’m seeing analyst estimates that seem to be a bit on the high side. Combining that with some concerns of the state of the economy, I do think that could make Boeing prone to profit-taking as even satisfactory results might not be enough and misses could lead to strong market reactions. So, that’s certainly a scenario that I’m keeping in mind, but I believe any share price weakness opens up opportunities to add shares as the company is just at the start of a significant improvement in cash flow and balance sheet health.