Red Flags in the Boeing 2Q 2019 Earnings Report

The Boeing 2Q 2019 earnings report was, as expected, pretty ugly. As the company admitted in the press release, revenue was down 35%, to $15.75 billion from $24.3 billion last year. The net loss was $2.94 billion, compared to net income of $2.2 billion in 2Q 2018. The 737 Max remains grounded. According to the earnings press release, “Disciplined development and testing is underway and we will submit the final software package to the FAA once we have satisfied all of their certification requirements.”

Chairman, president and CEO Dennis Muilenburg stated in the press release that “During these challenging times, teams across our enterprise continue to perform at a high level while delivering on commitments and capturing new opportunities driven by strong, long-term fundamentals.” However, the devil is in the details. Below are a few operational red flags that are listed in the fine print of the earnings report (and elsewhere), but certainly not highlighted in the press release.
 
Red Flags in the 2Q 2019 Boeing Earnings Report
 

1. Corporate Buybacks
2. Increased Dividends
3. Borrowed Money
4. Insider Selling
5. Pensions and OPEBs
6. Price to Earnings Ratio
7. Book Value

 
And here are the details behind each point.
 
1. Corporate Buybacks
Boeing repurchased $2.65 billion of its shares in the 2nd quarter of 2019. In 1Q, Boeing repurchased $2.574 billion. $9.257 in shares were repurchased in 2018.
 
2. Increased Dividends
Boeing paid $1.2 billion in dividends in the 2nd quarter. That’s 20% higher than last year.
 
3. Borrowed Money
Boeing borrowed $4.5 billion in the quarter. Cash and marketable securities are now $9.6 billion. Total liabilities and equity, including pensions and other post-employment benefits, total $126.2 billion. FYI: The last casualty to borrow in bonds to repurchase stock and pay dividends on such a level was General Electric. As you’re likely aware, the GE dividend is now just 4 cents, and the share price has imploded by 70% from its 2017 highs.
 
4. Insider Selling
So, why is Boeing so intent on buying back its own shares, instead of keeping the borrowed money to shore up operations, and perhaps hire more engineers and specialists, to return the 737 Max to operations? (The costs of products and services were lower this quarter than last year.) It’s clearly to keep the share price shored up and keep investors from selling the stock, by baiting them with a 2.2% yield on their dividend. Insiders at Boeing, however, have already dumped $30 million of shares since the first Lion Air crash on Oct. 29, 2018. The selling began on the exact day of the crash.
 
5. Pensions and OPEBs
​Boeing was $22.3 billion underfunded on its pensions and other post-employment benefits, as of 2017. From the 2Q 2019 earnings report, it does not look like the company used any capital to reduce this underfunding level. (We’ll get the full 2018 funding status by S&P Dow Jones Indices shortly.) In past market rallies, corporations were overfunded on their pensions. However, this time around, even with markets at an all-time high, pensions remain severely underfunded, as you can see in the chart below. 

Source: S&P Dow Jones Indices. © 2018. Used with permission.

6. Price to Earnings Ratio
The forward price to earnings ratio of Boeing is 28.27 – very high for a company that is losing so much money. So far, Boeing’s 3Q is not shaping up much better than 2Q was.  
 
7. Book Value
​Boeing’s book value per share is now just 22 cents. Economist Benjamin Graham is signaling caution to investors from his grave.
 
 
Will Boeing Pull Through?
Just as General Electric is still in business, Boeing is going to pull through this. However, that doesn’t mean that there won’t be investor casualties along the way. By many value measures, Boeing is overpriced. If you’re being lured in by the dividends, it pays to remember the age-old market aphorism – “Never reach for yield.” If you’re a pensioner, and you’re being offered a buy-out, then it’s worth considering. The current underfunding status, and the apparent lack of commitment by the company to fix it while the sun is still shining, is of great concern.
 
In the next downturn, the underfunding status will likely increase, and there will be fewer resources available to address it. That can mean a forced hair cut on pensioners, as it has for other companies faced with legacy costs, such as Boeing has.  
 
What Lies Ahead?
On Friday at 8:30 am ET, the Bureau of Economic Analysis will release the 2Q 2019 GDP growth report. Current estimates have it coming in at 1.4-1.6% growth. That is far below 1Q’s 3.2%. Investors are not likely to be happy. So, making sure that your portfolio is properly protected and diversified, and that you know what’s safe in a world where both stocks and bonds lost money in 2018, is a top priority.
 
 
Now is the time to fix the roof while the sun is shining (while the markets are at an all-time high). 

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