By Claudia Assis, MarketWatch
Boeing Co. missed quarterly expectations and pulled its guidance for the year, but its stock held fast to gains Wednesday as Wall Street breathed a collective sigh of relief that the company put a price tag on the 737 Max groundings fallout and its balance sheet was shown healthy.
Boeing /zigman2/quotes/208579720/composite BA +4.55% earlier Wednesday reported adjusted first-quarter earnings of $3.16 a share on sales of $22.92 billion, compared with FactSet consensus of an adjusted EPS of $3.19 on sales of $22.95 billion for the quarter.
It suspended its guidance and said it expected a $1 billion hit in increased expenses to take the 737 Max family to the skies again, including the cost of a software fix in the works. Boeing entered the second quarter with more than $7 billion in cash, which is better than what analysts had expected.
The quarter “was less about the financial results and far more focused on the impacts from the 737 Max grounding and its impact on production,” said Tom Kennedy, head trader and analyst at New England Investment & Retirement Group.
“With $1 billion in direct costs cited by management, we have more clarity into the near-term financial impact Boeing must face, giving investors more confidence that Boeing can handle the short-term headwinds to operating results,” Kennedy said.
Boeing’s “immense financial resources,” including its cash hoard and cash flows from its other business lines, will help it get through this, he said.
“Ultimately, the 737 Max problem dwarfs this quarter’s earnings. Any further updates as to the timing of any resolution, the costs associated with the solution, and clarity regarding the future ramp-up of production after a return to service will determine the impact on the remainder of this year’s results,” Kennedy said.
Wednesday’s earnings “paint a picture of a company with strong fundamental demand going about its business and not in any danger of a liquidity or financial crisis,” said Jim Corridore, an analyst with CFRA, in a note.
Boeing shares were recently 1.2% higher, and have gained 17% this year, roughly the same advance as the S&P 500 index’s /zigman2/quotes/210599714/realtime SPX -0.20% and compared with a 14% gain for the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.04% Boeing is a Dow component.
Since March 8, the last trading day before the crash in Ethiopia, the company stock has lost 11%, including a 13% nick in March.
Boeing showed that it is “making progress” toward resuming 737 Max service this summer, Corridore said.
The 737 Max has been grounded world-wide after being in two fatal crashes less than five months apart. The crashes, the latest in Ethiopia in March, appear to be related to one of their anti-stall features.
That $1 billion is likely a placeholder as analysts had factored in much larger sums, to include payouts to the families of the people killed in the crashes as well as compensation to airlines and suppliers left scrambling in the wake of the groundings.
Boeing’s decision to pull its guidance “is no surprise,” analysts at JPMorgan said in a note. That’s given how critical the 737 is to its financial performance and the uncertainty around when Max deliveries will resume, they said.
There were no deliveries after the Ethiopian crash. Commercial jets are the biggest chunk of Boeing’s revenue, around $12 billion this quarter, with the company's aerospace and defense business a distant second, around $7 billion this quarter.
Due to the Max imbroglio, that gap is seen as narrowing in the second quarter, with FactSet consensus calling for commercial-plane sales around $9 billion and aerospace and defense revenue around $6.5 billion in total revenue of $20 billion.
Boeing is “shielded” from 737 Max order cancellations as the plane’s closest competitor, Airbus SE’s A320neo, has and extensive order backlog, and airlines are hungry for fuel-efficient single-aisle jets, analysts at Oxford Economics said in a note last week.
That moat is not forever: on Tuesday The Air Current, a digital aviation publication, reported that Southwest Airlines Co. /zigman2/quotes/201071949/composite LUV +0.14% , a 737 stalwart, had sent a team of employees to check out Airbus’ A220s in Europe.
That’s “an heretical move by the airline that has been built on just flying the 737,” Robert Stallard at Vertical Research Partners said in a note earlier this week. Boeing and Southwest did not comment on the report, Stallard said.