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Why is Boeing's share price still flying high despite Q4 losses?

Boeing's share price closed 1.7% higher on Wednesday despite recording its first full-year loss since 1997.

Source: Bloomberg

US aircraft manufacturer Boeing Co. (NYSE: BA) continues to be hampered by the ongoing 737 MAX grounding.

The company recorded a 37% year-on-year revenue decline for the fourth quarter of 2019 to US$17.9 billion and unadjusted earnings per share (EPS) loss of US$2.33.

Across the full financial year, Boeing turned in a net loss of US$636 million and a decline of 24% in gross revenue. Operating cash flow was also in the negative at -US$2.45 billion, of which over 90% came from Q4.

This is the aviation group’s first annual loss since 1997, when it reported full-year losses of US$178 million.

Breaking down the Boeing breakdown

While declines were expected for this quarter, official earnings still came in well below analyst predictions.

Analysts polled by Refinitiv were expecting earnings of US$1.47 per share, while those over at CNN Business indicated an EPS of US$1.32 and revenue of US$21.7 billion.

By business segment, Commercial Airplanes fourth-quarter revenue fell 57% to US$7.5 billion from the same quarter a year prior, on the back of lower 737 deliveries related to the 737 MAX grounding dating back to March 2019.

In March 2019, all aviation regulators globally banned the 737 MAX, following two air crashes involving the aircraft model – Lion Air Flight 610 in October 2018, and Ethiopian Airlines Flight 302 in March 2019.

The Defense, Space & Security segment, which had held up part of Boeing’s previous quarterly financials, also suffered a 13% drop in revenue in Q4 to US$5.96 billion from US6.87 billion a year prior.

The company attributed the decline to lower volume across the portfolio as well as the impact of a precautionary Commercial Crew charge of US$410 million for an existing NASA astronaut test mission.

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What does this mean for Boeing’s FY2020 outlook?

To Boeing’s credit, it was extremely forthcoming about its problems. New president and CEO David L. Calhoun admitted that the company has ‘a lot of work to do’, particularly in ‘rebuilding trust’ with the ‘flying public’ and with company stakeholders.

‘We will do so through a commitment to transparency in everything we do, and by meeting or exceeding expectations. We will listen, we will seek feedback and respond appropriately, urgently and respectfully,’ he said during a call with analysts.

The first order of business, he added, is to return the 737 MAX to service safely, through the company’s new focus on ‘transparency’ and ‘operating with excellence’.

‘We are committed to do it across our Commercial, Defense, Space & Security, and Services businesses. This is not relegated to just the MAX or the 737. This requires a focused approach and simplification in everything we do to ensure we deliver on what matters most with accountability,’ Calhoun said.

Boeing’s damage control rhetoric is par for the course, but the fate of the troubled aviation giant still looks somewhat murky in a sea of unanswered questions.

The company, which was the world’s biggest plane maker until it handed the title to Airbus last year, has been trying to get regulators to clear the MAX. However, it hinted last week that the earliest possible approval date would likely be in June 2020. The company had halted production on the type at the start of the year.

Analysts have stated that the ongoing grounding could cost Boeing up to US$20 billion by June 2020 in lost revenue and compensation to airlines and victim families. Every passing month of stagnation would only incur more costs.

Furthermore, the company stated in this Q4 report that it plans to cut the 787 production rate to 10 aircraft per month in early 2021 due to the ‘current environment and near-term market outlook’, indicating more sales headwinds ahead.

Why are Boeing shares still trading above US$300?

Despite a spreadsheet of red lines, Boeing’s share price was able to close 1.71% higher on Wednesday.

One reason for this appears to be because much of the market apprehension has already been priced in to the shares, as most analysts have been maintaining ‘hold’ ratings on the stock since the year started.

Another possible theory is that investors were relieved that Q4’s pre-tax charge – compensation sums paid to customer and airline compensation related to the 737 MAX grounding - of US$2.6 billion was significantly lower than the charge of US$5.6 billion taken in Q2.

IG trading specialists also hypothesised that Boeing equity, which is one of only 30 blue-chip stocks listed on the highly-controlled US Dow Jones Industrial Average, was being kept afloat by index fund managers who have found themselves caught in a catch-22 situation.

‘The index managers cannot exit because they have to follow the index composite,’ they said. Generally, fund managers purchase mutual fund units from mutual fund companies instead of the open market, and this prevents shorting on index funds.

‘This is why the share price is still holding up above US$300, because it is hard for fund managers to exit since it is harder for them to short,’ they added.

Boeing shares are currently trading at US$322.02.

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