It’s finally over. On Monday, by a vote of 59% for and 41% against, the International Association of Machinists (IAM) voted to accept a new four-year contract from Boeing(NYSE: BA).
Under the terms of the new contract, IAM members will see wages rise 38% over the next four years, receive higher 401(k) matching funds (but no reinstatement of the company pension), and pay lower healthcare premiums. Most importantly, after 54 days on the picket line, workers will start returning to work on Wednesday. Boeing can get back to building airplanes (more precisely, the 737, 767, and 777 airplanes on which construction was halted during the strike).
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Investors aren’t quite so lucky. We still have some work to do in calculating the damage done to Boeing stock over the past 52 days that this strike lasted, and we need to consider the damage that will be further done to Boeing’s financials over the coming years.
We’ll begin with what we know for certain, as reflected in Boeing’s Q3 earnings report, issued late last month.
The good news is that although Boeing’s labor strike slowed down sales in the quarter, the slowdown affected only the last 17 days, from Sept. 13 through 30. While commercial airplane revenue declined 5%, in terms of commercial aircraft delivered, Boeing actually delivered more airplanes in Q3 2024 than in Q3 2023 (116 versus 105). Boeing was also helped by recording small percentage increases in revenue at its global services unit (revenue up 2%) and at Boeing defense (up 1%).
Thus, while total Q3 revenue declined compared to last year’s Q3, the decline was only 1%, to $17.8 billion.
The bad news is that Boeing’s profits didn’t get off so easily. Operating margins at the aerospace giant, already running negative for years, got even worse in Q3, falling to negative 32.3%.
The blame here was shared unevenly. Global services profits actually climbed 6% year over year to $834 million. But, hurt by charges on its T-7A training jet, MQ-25 naval drone, and KC-46A refueling tanker contracts, as well as on its Starliner spacecraft, Boeing recorded a $2.4 billion operating loss from its defense division (BDS). Commercial airplane losses, meanwhile, exceeded $4 billion.
On the bottom line, Boeing lost $6.2 billion, or $9.97 per share.
As explained above, not all of this loss was due to the strike. The losses at BDS, for example, had little to do with striking commercial airplane workers. Still, Boeing highlighted the “impacts of the IAM work stoppage” as the No. 1 factor causing its big loss. More than just sales delayed by the work stoppage, Boeing also took $3 billion worth of charges to account for both the cost of a year-long delay in introducing its new 777X and the shuttering of its 767 Freighter line — both measures taken to cut costs and conserve cash because of the strike.
So, what does this foreshadow for Boeing’s future?
Running from July 1 through Sept. 30, Boeing’s third-quarter report included results from the first 17 days (about the first third) of the strike. So, very roughly speaking, investors can estimate that whatever losses Boeing incurred due to the strike in Q3, the strike-related losses in Q4 will be roughly twice as big.
How big were those losses? If we subtract the $3 billion in charges for the 777X and 767 programs from the $4 billion total loss at the commercial airplanes division, this implies the strike cost Boeing $1 billion in Q3 from sales lost during the strike. This further implies that strike-related losses will cost Boeing another $2 billion in Q4.
Looking farther out, Boeing has burned through $10.2 billion in negative free cash flow so far this year. The good news is that this puts the company on course to outperform analyst forecasts (as collated by S&P Global Market Intelligence) for $14.1 billion in negative free cash flow this year. The bad news is that those forecasts probably don’t include cash burned during the last two-thirds of the strike.
Potentially, Boeing could end up burning more cash than forecast this year. And Boeing has warned that it will continue burning cash throughout 2025 as well. Analysts forecast negative free cash flow of $3.4 billion in 2025, turning free cash flow positive only in 2026.
Granted, analysts still see Boeing reporting positive generally accepted accounting principles (GAAP) profits next year. However, as I’ve warned previously, debt costs and stock issuances by Boeing, combined with pay raises for its machinists (and probably others), are likely to cut deeply into these profits. Depending on how many shares Boeing ends up issuing and how quickly, per-share profits could be as much as 27.5% less than analysts currently forecast — as little as $1.85 per share.
On a share price of roughly $148, that implies a forward P/E ratio of 80.
Going forward, new CEO Kelly Ortberg warned that “it will take time to return Boeing to its former legacy.” Beyond just getting the machinists back to work, he says, Boeing will be “fundamentally changing the culture, stabilizing the business and improving program execution, while setting the foundation for the future of Boeing.”
Boeing must do all of this and more before I’ll be able to recommend the stock as a “buy” at this price.
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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.
