Boeing's (NYSE: BA) second-quarter earnings report was a mess -- bad enough that it may have gotten its chief executive officer fired.
Boeing missed earnings. It missed sales. It tallied $4.3 billion in negative free cash flow, and it has burned $8.2 billion so far this year. Part of the problem was Boeing's commercial airplanes unit, where deliveries fell 32% year over year in Q2. But Boeing's defense business is in a bad way as well, with sales slipping only 2% but operating profit margin so deeply negative that losses soared 73%.
Things are so bad at Boeing Defense, Space, and Security (BDS) that aerospace analyst Chris Quilty of Quilty Space quipped, "I wouldn't be entirely surprised if they spun out or sold the Defense & Space business as a way to mitigate their sprawling problems."
Selling Boeing Defense
Surprising as the claim might sound, this isn't idle speculation.
Ten years ago, then-Boeing Defense head Leanne Caret publicly mused about a potential exit from the defense market, admitting that Boeing was "evolving ... what the fighter business means to us" after losing a series of high-profile fighter jet contracts to rivals such as Lockheed Martin.
Back then, the businesses that made up what is today called BDS were still pulling in $31 billion in annual revenue, and earning operating profit of $3.1 billion annually. That was a respectable 10% operating profit margin, according to historical data provided by S&P Global Market Intelligence.
But last year, BDS brought in less than $25 billion in revenue -- and had a loss of$1.8 billion.
So you can see why Boeing might be a little upset with its BDS performance right now, and might conceivably consider selling the unit and focusing on just one problem at a time.
A Defense-less Boeing
But what would Boeing look like without BDS?
Well obviously, it would be a smaller company. Subtract $24.9 billion in BDS revenue from the $78 billion that Boeing brought in last year, and Boeing would be roughly a third smaller, and focused almost exclusively on building commercial airplanes like the 737 and 777, and servicing them through its global services unit.
But here's the thing: A BDS-less Boeing would be a smaller Boeing, true. But it also might actually be a profitable Boeing, which a lot of investors would probably find appealing.
Consider that last year, global services was actually the only Boeing unit that earned any profit at all, and not an insubstantial profit, either, but $3.3 billion. That would be enough profit to more than offset the $1.6 billion a year that Boeing Commercial Airplanes is (still) losing. It would be enough to turn Boeing as a whole instantly profitable, even after taxes. And this would give the company more resources for it to devote to turning around the ailing commercial airplanes business.
Losing the defense business might even help Boeing make its commercial airplanes and global services businesses more profitable, by fixing the quality issues that have slowed airliner production for example. That would make its planes more appealing to its airline customers, and ramping up production rates to bring in new commercial airplane revenue to replace the defense revenue it was losing.
The upshot for Boeing investors
True, selling its defense business would limit future upside, as Boeing would not have BDS to turn around. But even in a perfect world, there's no guarantee Boeing would succeed in a turnaround. (Remember, the shrinking defense business has been a decade-long problem for Boeing already). Selling BDS would also remove from Boeing's plate such issues as its glitchy Starliner spacecraft and its overpriced Space Launch System space rocket (which remains under perpetual threat of cancellation in any case -- so no great loss there).
All things considered, I actually agree with Quilty. Selling BDS is an option Boeing should consider.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.
