Greater than a dozen years in the past, Boeing (BA 3.10%) made a foul wager — and it is getting worse with age.

In 2011, determined to win contracts for a protection enterprise that was struggling flat revenues and declining income, and threatened by rival defense contractors making an attempt to horn in on its aerial refueling tanker enterprise, Boeing bid low on a contract to construct new “KC-X” refueling tankers for the U.S. Air Drive. For simply $31.5 billion ($176 million per airplane), Boeing promised to construct the Air Drive a fleet of 179 new tankers — a full 10% beneath the bid made by rival Airbus. And Boeing gained the contract.

On the time, I wrote an article warning that this is likely to be a Pyrrhic victory for Boeing. Sure, it had gained the contract, and all of the revenues that got here with it. However in doing so, as I famous, “Boeing additionally lower its revenue margin to the bone.”

Seems, I used to be over-optimistic. Boeing lower proper by its margins — after which started sawing into the bone as nicely.

$7 billion in losses, and counting

Since delivering its first KC-46 refueling tanker (because the KC-X has been renamed) to the Air Drive in January 2019, Boeing has racked up an astounding $7 billion in losses on this system, as Protection One reported again in April — and it is not executed but.

To this point, the Air Drive has ordered 128 out of a deliberate 179 KC-46 tankers. Divided by $7 billion in losses, that works out to a mispricing of every airplane by about $55 million. To just break even, Boeing ought to have charged the Air Drive one thing nearer to $230 million per airplane (which is logical, as a result of even the plain vanilla 767 airliner upon which the KC-46 is predicated lists for almost $220 million).

Granted, if Boeing had advised the Air Drive again in 2011 that its desired 179 airplanes would price greater than $41 billion, Boeing most likely would have misplaced the contract to Airbus (which bid $35 billion on the KC-X contract). However no less than then, it will be Airbus, not Boeing, reporting losses right now.

If needs had been fishes… then Boeing would lose much less cash

Water below the bridge, you say? Errors had been made, however they are often rectified? Maybe.

Boeing might make up its losses by charging for upgrades of the airplanes as soon as they’re constructed, and charging extra for sustaining the plane over time. And, because the incumbent supplier of Air Drive tankers, Boeing might be nicely positioned to compete for a tanker contract the following time the Air Drive wants somebody to construct extra flying fuel stations.

However within the meantime, this river retains flowing — and Boeing’s losses continue to grow.

Boeing nonetheless has 51 planes left from its unique obligation to construct 179 below the fixed-price contract, so it is most likely going to lose no less than one other $2.8 billion earlier than the contract wraps. And actually, the following batch of losses is true across the nook.

You see, on Nov. 28, the Pentagon’s day by day digest of contract awards confirmed that Boeing had simply “gained” a contract modification instructing it to construct the following 15 KC-46 tankers for the Air Drive. Valued at $2.3 billion, this contract will add to Boeing’s revenues — but additionally to its losses.

Is Boeing inventory a promote?

Talking of which, in October’s third-quarter report, Boeing reported $1.6 billion in losses on $18 billion in income. Granted, not all of Boeing’s losses derived from the KC-46 program. However the firm’s protection, house, and safety division, which homes not solely the KC-46 program but additionally the company’s troubled Starliner spaceship, was by far the most important contributor to losses within the quarter, costing Boeing $924 million.

That is the unhealthy information. Now here is the excellent news.

Boeing made an enormous mistake with the value it bid on the KC-46. However no less than we are able to say that, with 128 out of 179 planes delivered, Boeing is seven-tenths of the way in which by placing its KC-46 losses within the rear-view mirror. On the similar time, its business airplanes enterprise is bettering, with income up 25% yr over yr in Q3, and its international providers enterprise is rising each gross sales and earnings at wholesome, high-single-digit proportion clips.

Better of all, thanks largely to the revival of its business enterprise, Boeing lastly seems flush with money once more. Free money stream yr to this point is a good $4.6 billion. And in line with analysts polled by S&P Global Market Intelligence, that quantity might develop 30% to almost $6 billion subsequent yr.

At a market capitalization of $142 billion and a ahead price-to-free-cash-flow ratio of almost 24, I am not able to name Boeing inventory “low-cost” simply but. However no less than there is a mild on the finish of the tunnel.

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