Boeing is going, and its CEO is already gone

Since reporting second-quarter earnings last week, shares of Boeing (NYSE: BA) have lost $25 in value — a stock market decline of more than 13% — at the time of writing. That shouldn’t come as a huge surprise, though.

Boeing’s earnings were truly dire. Bad enough, in fact, to cost Boeing’s CEO his job.

Boeing by the numbers

Boeing “missed earnings” by a large margin last week. First, revenue was more than $300 million below expectations at $16.9 billion. All in all, the company reported a net loss of $2.33 per share. The company’s cash flow statement showed a cash burn of $4.3 billion in a single quarter.

To put these numbers into historical perspective, sales were down 15% year over year, while losses were up 832%. Free cash flow — positive in the second quarter of last year — has turned negative. Cash exchange, which was also negative in Q1, accelerated in the second quarter. So far this year, Boeing has burned through more than $8.2 billion in total, reducing cash reserves to $12.6 billion against $57.9 billion in debt.

What’s going wrong at Boeing

Management attributed the declines primarily to two factors, citing “lower volume of commercial deliveries and losses from fixed-price defense development programs.” Commercial jet deliveries this quarter totaled just 92 units, down 32% from last year’s second quarter, resulting in a 32% drop in revenue at (what was) the company’s biggest business Boeing. In contrast, sales fell just 2 percent at the company’s defense, space and security unit.

Operating losses widened at both businesses, rising 87% at commercial aircraft and 73% at Boeing Defence, Space and Security (BDS), with operating profit margins increasingly thin at both units.

Only Boeing’s global services unit showed any improvement from last year, and even there it was minimal. Revenues rose 3%, operating margins rose just 2%, and profit margins fell.

Help Wanted: A New CEO for Boeing

Despite all the above evidence that all is not well at Boeing, CEO Dave Calhoun insisted that the company is “making substantial progress in strengthening our quality management system and positioning our company for the future.” But he won’t be around to see them.

Just minutes after the earnings came out, Boeing announced that Calhoun would retire from Boeing after less than four years at the helm. The change was planned because Calhoun announced in October that he would step down once the company found a new CEO.

On August 8, former Rockwell Collins and RTX exec Robert K. “Kelly” Ortberg will take over as CEO and try to fix what Calhoun couldn’t.

The story continues

It will work for him.

What needs to be fixed at Boeing

As is known by now, Boeing has several issues that need fixing, starting with chronic quality control issues in its commercial aircraft unit (doors falling off planes and such).

However, as management confirmed, the company also has to contend with the Pentagon’s efforts to shift more risk to its contractors by insisting on fixed-price agreements for defense contracts. That shift has already cost Boeing billions of dollars in write-downs on its Air Force tanker contract, for example, which Boeing won in a fixed-price bid, making Boeing nervous about doing such deals with fixed price in the future. The problem is, if Boeing refuse to sign fixed-price contracts, may begin to lose defense contracts to competitors who will sign them. This could cost Boeing not only revenue in the future, but also profits.

Scan a little further and you’ll also find issues with Boeing’s space business (which is a small but not insignificant part of BDS). Specifically, a Starliner crew transport — the spacecraft Boeing depends on to fulfill its multibillion-dollar contract with NASA — is currently docked at the International Space Station, where it has been stuck for the past two months. More than two weeks after the sales deadline, Boeing and NASA are still considering whether it’s safe to use the Starliner to bring its crew of two astronauts back to Earth. If they ultimately decide it is not sure, NASA will probably have to use a SpaceX Crew Dragon to retrieve the astronauts.

Such an ignominious end to Boeing’s ISS mission could put the final foot in the Starliner’s coffin and force Boeing to end its crewed spaceship project altogether, resulting in billions of dollars in losses for BDS—and even more many billions of dollars in losses for BDS. Boeing itself.

What it means for investors

As a $100 billion stock, you wouldn’t typically expect a company like Boeing to be a risky bet. However, the days when an investment in Boeing could be considered “safe” are over. Boeing couldn’t even afford a dividend from 2020. And why not? According to data from S&P Global Market Intelligence, Boeing has not been profitable since 2018.

Boeing today is a throwback, pure and simple. And an investment in Boeing is essentially a bet that new CEO Kelly Ortberg can fix what his predecessors broke.

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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 Goes and Its CEO Is Already Gone was originally published by The Motley Fool