Strong sales of commercial jets and cash payouts to investors have made Boeing a Wall Street darling. Now the aerospace giant is preparing to deliver its worst financial results in nearly two years, as a worldwide grounding of its flagship jet puts the future of its biggest cash generator in doubt.
As Boeing reports first-quarter results on Wednesday — the company’s first financial update since its 737 Max jets were grounded last month — analysts surveyed by Bloomberg expect adjusted earnings to drop 11 percent to $3.25 per share, their steepest year-over-year decline since late 2017. The company will probably tell investors it can no longer predict its financial performance for the rest of this year, as orders for thousands of 737 Max planes remain held up until the company can fix the problems that contributed to two deadly crashes and persuade global regulators to let the jets back in the air.
The souring picture for Boeing’s business shows how quickly the crashes have reversed the company’s fortunes. Until recently, Boeing was prized by investors as a cash-producing machine with huge growth potential ahead; Boeing has outperformed Wall Street earnings estimates for 11 straight quarters. This month, it cut 737 Max production to 42 planes a month — down from 52 — signaling that a fix for the jet could take months to implement and approve. Analysts estimate the company and its insurers could be on the hook for billions of dollars in payouts to airlines and families of crash victims.
For Boeing, “2019 is a lost year in terms of financial performance,” said Seth Seifman, an analyst at JPMorgan.
CEO Dennis Muilenburg has apologized for the loss of life caused by the crashes. He said earlier this month that Boeing is working with customers to minimize the financial impact of the grounding and the slower rate of new plane production.
Boeing’s free cash flow, a closely watched measure of how much cash the company generates after taking out the cost of capital expenditures, such as factory improvements, may fall precipitously as Boeing continues building planes that sit idle in production facilities in Renton, Wash., and elsewhere.
Cai von Rumohr, a senior analyst at Cowen, estimates that Boeing could report zero free cash flow during the first quarter and negative free cash flow in the second quarter, before rebounding later in the year. He predicts around $12 billion in free cash flow for the whole year — well below his earlier estimate of $16 billion. Boeing had said in January it expects free cash flow this year of between $17 billion and $17.5 billion.
The production slowdown could cause Boeing to stop giving so much cash back to its investors in the form of share buybacks. Boeing has been at the forefront of a recent wave of corporate buying of shares, purchasing about $24 billion in shares over the past three years. That represented nearly three-quarters of the company’s free cash flow over that period.
Investors usually like buybacks because they reduce the total shares in the company, making each share more valuable. Critics argue Boeing should invest more of that cash in the business, building new technology or raising worker wages and benefits. Boeing has spent $11 billion on research and development over the past three years, slightly more than rival Airbus, which spent $9.2 billion on R&D over the same period.
Boeing pledged last year to buy back $18 billion in shares through 2021, the largest repurchase program in the company’s history. JPM’s Seifman said he expects the company to suspend buybacks in light of the 737 Max problems. Boeing also gives investors a quarterly payout, called a dividend, of $1.71 a share, which it will probably keep doing.
Shares in Boeing have nearly tripled in value over the past three years, the most rapid rise in the company’s history and close to four times faster growth than the Dow Jones industrial average over that period. But investor confidence in Boeing has wavered since the second crash of a 737 Max 8 last month in Ethiopia, shaving about 10 percent from its market value.
Commercial planes made up 60 percent of Boeing’s sales last year, with defense products, such as helicopters and missile systems, accounting for 23 percent. Boeing has a backlog of orders for more than 4,000 737 Max planes, making it the company’s biggest growth engine for years to come.
Those sales could be in limbo if Boeing can’t convince regulators, airline customers and the public of the plane’s safety.
The Federal Aviation Administration grounded the 737 Max on March 13 so authorities could investigate “the possibility of a shared cause” between the crashes in Ethiopia and Indonesia. Boeing’s Muilenburg has since acknowledged an anti-stall system unique to the 737 Max played a role in both crashes.
Boeing has delayed its initial timeline for a software fix, which was initially expected to be completed in April. It’s unclear how long the FAA and other regulators around the world could take to approve the fix. Boeing may struggle to get approval from China, which was one of the first to ground the 737 Max following the Ethiopia crash and is locked in trade tensions with the United States, Seifman said.
Airlines hoping to buy the planes don’t have much choice other than waiting for Boeing’s fix. The only other manufacturer with a competing offering is Airbus, which has its own long backlog of orders. But the airlines could choose to cut or cancel their orders, as Indonesia’s national airline, Garuda, said last month it planned to do.
Boeing also needs to repair its reputation with passengers. The number of people booking air travel grew an estimated 6.5 percent last year, according to the International Air Transport Association. That growth could slow if Boeing’s crashes deter people from booking flights.
“The general flying public seems to be asking more questions about the [737 Max] than they have with prior fleet groundings,” Goldman Sachs analyst Noah Poponak told clients in a research note earlier this month.
Because of potential risks in Boeing’s ability to fix the 737 Max, competitive threats and potentially weakening consumer demand, Poponak lowered his earnings estimate by 8 percent this year and 2 percent next year.