Why Markets Still Favor Boeing Stock Despite a Missed Quarter

The second quarter of the 2024 earnings season is bringing the market together. From the consumer staples sector to the technology sector, every investor is looking for their favorite names to deliver better-than-expected quarterly results and, of course, hoping for the market to reward them with a higher stock price as a result. However, not all bad quarters mean a bad stock price.

Taking shares of Boeing Co. (NYSE: BA) as an example, the company's quarterly earnings report was less than spectacular, but the market sent the stock rallying by 2.1% in the pre-market hours of Wednesday morning. The reason a stock will react positively in the face of negative financial performance is always found either deep in the financial statements or in some qualitative change for the business.

In the case of Boeing, both of these occurrences have brought bullish investors together and sent the stock higher. The question now becomes whether the company can deliver on its new qualitative promises and how these will eventually affect future company financials, and investors should be paying attention to that.

An Indispensable Business with an Indispensable Plan: Boeing Sock’s Path

Starting from the top, investors should understand why Boeing is looking to make changes in the first place. Revenue declined by nearly $3 billion over the past 12 months, a percentage drop of 14.6% that should have been enough to scare away anyone.

According to Boeing's investor presentation, operating margins also fell deeper into the negative to 8.3% from a narrower 2.0% a year prior. The worrying part of the financial results is Boeing's free cash flow or the lack thereof.

Boeing's negative free cash flow of $4.3 billion puts it in a very tight spot. It will now have to consider either diluting shareholders by issuing shares to fund its operations or issuing bonds during a high interest rate environment (which will place a heavy interest expense burden on the company).

The choice is not easy, but there is one thing Boeing can lean on to cushion these operating losses. Up to $516 billion in order backlog is sitting and waiting to be delivered by Boeing, mainly composed of commercial airplanes. Knowing that Boeing has only one real competitor in Airbus (OTCMKTS: EADSY), investors could feel confident that this backlog will see a decent turnover.

However, more is needed to make markets forget about the heavy losses Boeing brought this quarter, so here's something else to focus on.

Boeing's Latest Acquisition, CEO Change, Pave the Way for Recovery

Announcing an acquisition for Spirit Aerosystems Holdings Inc. (NYSE: SPR) will enable Boeing to regain control over the few security incidents that have caused it so much turmoil lately. Investors need to know that by acquiring Spirit, Boeing will ultimately oversee some of the part manufacturing and safety protocols and avoid further incidents.

While that could have been why markets rewarded Boeing stock so early in the morning, it’s not the whole picture yet. With the Transportation Security Administration (TSA) announcing record daily traveler numbers lately, the airline industry must have enough aircraft to keep up with the coming demand.

Moving past the micro, the Federal Reserve (the Fed) is now looking to cut interest rates before the next quarter is over. According to the CME’s FedWatch tool, there is over a 90% probability that this will happen, and lower rates will bring higher consumer activity (travel included).

Facing these tailwinds and the end of the cycle that comes every few years, Boeing wants to ensure that the company can benefit the most from it this time, which is why they have announced the newest addition to the C-suit.

The current CEO, David Calhoun, will be replaced by Kelly Ortberg. As an aviation industry veteran with over 35 years of experience and an engineering background, investors are taking a vote of confidence in his future leadership by letting the stock rally even in the face of a less-than-exciting quarterly result.

Wall Street analysts like the new CEO choice and the acquisition. They now forecast up to $4.19 in earnings per share (EPS) for the next 12 months, a nice change from today’s net losses.

More than that, those at the UBS Group have slapped – and kept – a price target of up to $240 a share for Boeing stock, daring it to rally by 28.5% from where it trades today. These optimistic views and fundamental changes may have also drawn away bearish traders, as Boeing stock’s short interest declined by 5.7% in the past month.

The article "Why Markets Still Favor Boeing Stock Despite a Missed Quarter" first appeared on MarketBeat.