Incoming Boeing CEO Kelly Ortberg probably didn’t need a reminder of what he’s walking into. Nonetheless, the troubled airplane manufacturer’s Q2 earnings, posted just before his hire was announced last Wednesday, underlined the mess he’s inherited. The company reported a loss per share of $2.90, missing analyst expectations by almost a dollar. Its core operating loss more than tripled from last year to $1.4 billion.
Even with a respected industry veteran assuming the helm Thursday, the numbers could get worse. Two decades of leadership missteps at the company have been well documented, but Bank of America senior analyst Ronald Epstein said Boeing’s credibility issues also taint how investors view its financials.
“They’ve been saying—quarter after quarter after quarter—a certain narrative, and it just hasn’t played out,” Epstein told Fortune, expanding upon his note on Boeing titled, “A bad quarter, and by no means was this the kitchen sink.”
Boeing shares still jumped last Wednesday after the company confirmed Ortberg’s appointment, closing above the $190 mark. They’ve since dropped 12% to open at $167 on Wednesday, however. The stock is down 35% year to date and has fallen 62% from its all-time high of $440.62 in March 2019.
That’s put Boeing among the 10 worst performing stocks in the S&P 500, though Epstein said it would likely be worse if Boeing didn’t benefit from a global duopoly for large commercial airplanes with Airbus. But fixed-income investors are still jittery, he said, about the possibility the company’s bonds could be downgraded from low-investment-grade to junk.
That’s because the company is burning significant cash—$4.3 billion during the last quarter and likely $9 billion to $10 billion for the year. That doesn’t include the approximately $4 billion in debt Boeing will absorb by acquiring Spirit AeroSystems, which makes the fuselage, or main body, of Boeing’s aircrafts.
“It’s one of the few names I cover now where investors are as focused on the balance sheet as they are on the income statement,” Epstein said of Boeing, “because they have so much debt.”
To right the ship, Boeing found the outsider it wanted in Ortberg, who led Rockwell Collins from 2013 to 2019 as the company doubled its sales and became the third-largest aerospace company in the world. Epstein agreed hiring an outsider was the right move, saying Ortberg would be able to cast a wider net for talent than a Boeing insider and could draw upon the experience of fostering a renowned culture at Rockwell Collins.
“But it’s not going to happen overnight,” Epstein said.
Boeing’s commercial and defense businesses continue to struggle
Investors hope a culture shift will translate to better results. Boeing’s Q2 revenue missed expectations and fell below $17 billion, down 15% from the same quarter last year. Revenue from the commercial airplane business dropped 32% as Boeing delivered just 92 planes over the three months, compared with 136 in the same period last year.
The decline in deliveries, Epstein noted, had nothing to do with the cap the Federal Aviation Administration imposed on 737 Max production after a panel on one of the planes blew off during an Alaska Airlines flight in January.
“They made the decision, basically, to slow everything down to try to fix everything before they sped it back up,” Epstein said. “That’s probably the right decision, but that takes time.”
Another day, another Boeing story
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The FBI has informed passengers aboard the Alaska Airlines flight that lost a panel shortly after takeoff in January that they may be victims of a crime
A reminder of what it was like inside the cabin: pic.twitter.com/hFGkYPoyQG
Boeing’s defense and space business is also struggling—and not just because two NASA astronauts remain on the International Space Station owing to issues with Boeing’s Starliner capsule. The company took $1 billion in losses on certain fixed-price development programs for which they underbid, most notably a $391 million loss on production of the KC-46A, an Air Force oil tanker.
“The margins on those programs have been really, really bad,” Epstein said.
As global defense spending increases, Boeing’s results pale in comparison to those of their peers. General Dynamics and Northrop Grumman, for example, reported that earnings per share increased by 21% and 19% last quarter, respectively.
“All those guys are going gangbusters right now,” Epstein said, highlighting just how much work Ortberg has ahead of him.
