Here’s a simple solution to make Boeing profitable again in one step.
Boeing‘S (BA -0.19%) The second quarter earnings report was a disaster – so bad that it might have led to the firing of the CEO.
Boeing hasn’t made its profits. It hasn’t made its revenues. The company had negative free cash flow of $4.3 billion and has burned through $8.2 billion so far this year. Part of the problem was Boeing’s commercial aircraft division, where deliveries fell 32 percent in the second quarter compared to a year ago. But Boeing’s defense division is also in bad shape. Revenues fell only two percent, but its operating margin was so negative that losses soared 73 percent.
The situation at Boeing Defense, Space, and Security (BDS) is so bad that space analyst Chris Quilty of Quilty Space joked, “I wouldn’t be really surprised if they spun off or sold their Defense & Space business to contain their ever-growing problems.”
Sale of Boeing Defense
As surprising as this claim may sound, it is not empty speculation.
Ten years ago, then-Boeing Defense chief Leanne Caret publicly reflected on a possible exit from the defense market, admitting that Boeing was “evolving… what the fighter jet business means to us” after the company awarded a number of high-profile fighter jet contracts to competitors such as Lockheed Martin.
At the time, the companies that now make up BDS had annual revenues of $31 billion and operating profits of $3.1 billion, representing a respectable operating profit margin of 10%, according to historical data from S&P Global Market Intelligence.
But last year, BDS generated less than $25 billion in revenue – and posted a loss of 1.8 billion dollars.
So it’s understandable why Boeing is currently somewhat dissatisfied with the performance of its BDS and may be considering selling the division and instead focusing on one problem at a time.
A defenseless Boeing
But what would Boeing look like without BDS?
Obviously, Boeing would be a smaller company. If you subtract $24.9 billion in BDS revenue from Boeing’s $78 billion last year, Boeing would be about a third smaller and would focus almost exclusively on building commercial aircraft like the 737 and 777 and maintaining them through its global services unit.
But here’s the thing: A Boeing without BDS would be a smaller Boeing, that’s true. But it could also actually be a profitable Boeing, which many investors would probably find attractive.
Consider that Global Services was actually the only Boeing division to make any profit last year, and not an insignificant one at that: $3.3 billion. That would be enough profit to more than offset the $1.6 billion that Boeing Commercial Airplanes (still) loses annually. It would be enough to make Boeing as a whole immediately profitable, even after taxes. And that would give the company more resources to put into turning around its ailing commercial aircraft business.
The loss of the defense business could even help Boeing to expand its commercial aircraft and global services businesses more become profitable, for example, by fixing the quality problems that have slowed production of commercial aircraft. This would make the planes more attractive to airline customers and increase production rates to generate new revenue from commercial aircraft and replace lost revenue from defense.
The conclusion for Boeing investors
It’s true that selling the defense business would limit future profits because Boeing wouldn’t have BDS to turn around. But even in a perfect world, there’s no guarantee Boeing could turn around. (Remember, the shrinking defense business has been a problem for Boeing for a decade.) Selling BDS would also get Boeing rid of problems like the faulty Starliner spacecraft and the overpriced Space Launch System rocket (which is in constant danger of being shut down anyway – so not a huge loss).
All in all, I agree with Quilty. Selling BDS is an option, Boeing should hold.
Rich Smith does not own any stocks mentioned. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.
