Evaluating Buy and Sell Opportunities Post Visa-Mastercard's $30B Deal

Posted on by The INO.com Team

Visa Inc. (V) and Mastercard Incorporated (MA) recently made headlines with a settlement estimated at $30 billion, marking a significant development in the U.S. retail and banking sectors. This antitrust settlement, one of the most significant in U.S. history, addresses long-standing disputes over credit and debit card fees stemming from a nationwide litigation that started in 2005.

V and MA have consented to various alterations in the short run as a component of the resolution. They agree that companies could decrease interchange rates - the charge merchants must pay for managing a credit card payment, also called “swipe rates” - by a minimum of 4 basis points (0.04 percent units) for three years. Swipe rates need to be seven basis points less than the average during the next five years.

In addition, it will become easier for merchants to guide customers toward other payment methods, and they can apply extra costs to premium credit cards with higher swipe fees. The settlement is still under the court’s endorsement and won't take effect until late 2024 or 2025.

Anticipated Impact on Merchants and Consumers

Patrick Payne, an assistant professor in personal and family financial planning at the University of Arizona in Tucson, does not expect “dramatic changes” from this agreement but thinks it might make premium cards more costly.

The cards are already costly. For example, the Chase Sapphire Reserve requires an annual fee of $550, but it offers benefits such as access to airport lounge membership and a $300 yearly travel credit. The annual fee for the American Express Platinum Card is almost $700.

Premium cards are more expensive for merchants, too. According to the National Retail Federation, swipe fees typically range around 2% per transaction but can go up as high as 4% for premium rewards cards. If the settlement gets approved, merchants will have the right to charge their customers extra when using premium Visa and Mastercard credit cards.

However, it's not certain whether stores will agree to increase the costs for these customers. Demanding an additional surcharge from specific customers, especially those who pay a lot, might harm relationships and business.

Now, what does it imply for the consumers, the ones who are actually swiping their cards? Probably not a lot, according to experts. “We’ll need to wait and see,” stated Ted Rossman, a senior industry analyst at Bankrate. “My honest assessment is that I don’t think this is a big deal for any party involved,” he said.

Rossman said the settlement’s impact is not much because it lowers swipe fees by less than 1% for a few years and caps the rates for five years. “That’s such a minimal change that I don’t think it’s going to make a big impact,” he remarked.

That said, critics argue that even though this new rule might control market powers, it does not necessarily solve issues related to dominance and setting fees.

Beverly Harzog, the writer of “The Debt Escape Plan: How to Free Yourself from Credit Card Balances, Boost Your Credit Score, and Live Debt-Free,” shared that she doesn't think there will be much alteration among credit card issuers following the agreement. This is partly due to alterations not being a “permanent fix.”

She mentioned how three- and five-year spans allow very little time for these firms to implement substantial changes.

Additionally, Rossman adds that the settlement is “a flash point in a larger war,” maybe the most crucial fight yet is about the Credit Card Competition Act. Democratic Senator Dick Durbin from Illinois suggested this law, and it might bring in more competition to this area.

Rossman believes that if Durbin’s bill becomes law, it would significantly affect the financial sector more than the recent settlement. He also mentions how improbable it is for this bill to be approved at the present time. “That's the type of thing that could really change credit cards,” he added.

Bottom Line

Visa and Mastercard are notable players in the consumer financial industry. They are primarily known for their dominance in high-margin businesses, characterized by a consistent increase in revenue and profit fueled by consumer spending. This aspect has garnered significant popularity among investors, as both V and MA stocks have delivered impressive returns over the years.

V and MA have not provided specific details on how the recent settlement could impact their performance in the coming years. Investors may have to wait for their next quarterly reports to gain more insight.

While both companies are financially strong enough to handle the effects of the settlement, the potential savings of $30 billion for merchants over five years translate to a significant annual impact of $3 billion for each firm. This could have substantial implications, potentially resetting revenue levels lower than their current status and leading to slower growth rates.

Besides interchange fees as the primary income source, V and MA earn money from other places, such as small-business solutions. However, most of their revenue still comes from interchange fees.

Despite these potential challenges, the fundamental business model of Visa and Mastercard remains unchanged. However, the settlement’s financial impact underscores the need for investors to closely monitor developments and assess how they could influence the companies’ financial performance and growth trajectory moving forward.

Additionally, regardless of the settlement’s unknowns, V and MA shares still trade at premiums over their peers. For instance, V’s forward non-GAAP P/E of 28.08x is 162% higher than the industry average of 10.54x. Also, its forward EV/Sales and EV/EBITDA multiples of 15.70 and 22.23 compared to respective industry averages of 3.02 and 10.52.

Likewise, MA’s forward non-GAAP P/E of 33.24x is 215.4% higher than the industry average by 10.54x. Additionally, the stock’s forward EV/sales and EV/EBITDA multiples of 16.12 and 26.24 unfavorably compared to the industry averages of 3.02 and 10.52, respectively.

Moreover, both V and MA exhibit notable volatility, with V boasting a 60-month beta of 0.96 and MA standing at 1.08. Considering these factors, investors may benefit from waiting for further clarity on the settlement's repercussions before scooping up shares of V and MA.

Is Taiwan Semiconductor Manufacturing (TSM) The Backbone of AI Chip Manufacturing?

Posted on by The INO.com Team

The semiconductor industry is experiencing an unprecedented buzz at the moment. In March, KPMG unveiled its 2024 Global Semiconductor Industry Outlook after surveying 172 executives in the field. A staggering 85% of these individuals projected a double-digit increase in the industry’s revenue in 2024.

The automotive industry, artificial intelligence (AI), and microprocessors remain the primary catalysts for growth in the semiconductor sector. Notably, NVIDIA Corporation (NVDA), a leading vendor of graphics processing unit (GPU) components essential to powering cutting-edge AI systems, has emerged as a prominent beneficiary due to its strong market position.

Another tech stock, Taiwan Semiconductor Manufacturing Company Limited (TSM), also seems well-positioned to ride the AI wave. Also known as TSMC, the company is the largest contract semiconductor foundry globally, with a market cap of $705.69 billion. It oversees production for many renowned chip designers, such as NVDA, Apple Inc. (AAPL), and Advanced Micro Devices, Inc. (AMD).

TSM is dominant in the third-party chip manufacturing sector, claiming over 50% of the market share. This immense power grants the company significant influence within the semiconductor industry, particularly in the realm of AI chips. TSM takes charge of approximately 90% of advanced chip production for third-party companies, making its role crucial for AI models reliant on such technology.

Furthermore, TSM is currently overcoming a previous downturn in the semiconductor sector and experiencing an upturn in growth, aided by advancements in artificial intelligence. On March 8, the company disclosed a consolidated revenue of NT$181.65 billion ($5.68 billion) for February 2024, representing a rise of 11.3% from February 2023.

Moreover, TSM’s January through February 2024 revenue reached NT$397.43 billion ($12.43 billion), showcasing a noteworthy surge of 9.4% compared to the corresponding period in 2023.

In addition, as of December 31, 2023, the company's cash and cash equivalents amounted to $47.66 billion, up 9.1% year-over-year. Moreover, as of December 31, 2023, total assets grew 11.4% year-over-year to $179.93 billion. TSM’s strong liquidity position provides resilience, flexibility, and opportunities for growth and value creation, enhancing the company’s financial health and competitiveness in the market.

Strategic Investments and Expansion Plans

TSM has been actively investing in strategic initiatives to fortify its global dominance in producing cutting-edge semiconductor chips. It boasts a staggering 90% share in manufacturing these highly coveted chips, integral to the functionality of various devices, including smartphones and AI technology.

Although there may be a few geopolitical uncertainties impacting TSM, with the company having its headquarters in Taiwan, which China asserts as part of its territory, it is actively expanding its operations beyond Taiwanese borders.

Recently, TSM unveiled its inaugural fabrication plant in Kumamoto, Japan. Plans are also underway to inaugurate two $40 billion facilities dedicated to producing advanced microprocessors in Phoenix, Arizona. Additionally, TSM has committed $3.80 billion to establish a fabrication plant in Dresden, Germany, marking its first establishment in Europe.

Furthermore, NVDA plans to introduce advancements to its H100 and GH100 models in the second quarter of 2024 - the H200 and GH200. It has also debuted the B100/B200 and GB200 on its Blackwell platform during GTC. These chip offerings will significantly enhance operations for NVDA’s AI GPU’s sole maker -TSM.

AMD predicts that the market for AI GPUs will reach $400 billion by 2027, with a CAGR of 70%. TSM has already committed substantial capital expenditures to increase its production capacity and meet customer demands in this expanding market.

TSM’s management anticipates that the fiscal 2024 first-quarter revenue will range from $18.0 billion to $18.8 billion. The company’s gross profit margin could fall between 52% and 54%, while its operating profit margin is expected to range from 40% to 42%. Its 2024 CapEx guidance of $28 billion to $32 billion indicates a strategic shift where the rate of capital spending growth is stabilizing as TSMC capitalizes on its growth opportunities.

TSM plans to manage its capital with a focus on several key objectives: funding organic growth, ensuring profitability, maintaining financial flexibility, and delivering sustainable and increasing cash dividends to shareholders. Owing to diligent capital management, TSM's Board of Directors authorized in November 2023 to increase the cash dividend for the third quarter of 2023 from NT$3 ($0.09) to NT$3.50 ($0.11) per share.

From now on, this will be the new minimum quarterly dividend level. The cash dividend for the third quarter of 2023 will be paid out in April 2024.

Moreover, TSM’s shareholders received a cash dividend of NT$11.25 ($0.35) per share in 2023, and they will receive a minimum of NT$13.5 ($0.42) per share in 2024. In the coming years, the company anticipates a shift in its cash dividend policy, moving from maintaining sustainable dividends to steadily increasing cash dividends per share.

Bottom Line

Investors aiming to capitalize on the AI boom should prioritize investing in companies that play an indispensable role in developing and promoting AI technologies. Focusing on foundational players in the chip industry is crucial as these companies are well-positioned to drive and benefit from AI advancements in the long term. One such promising industry player is TSMC.

Though TSM does not immediately appear as an AI staple, its role in the AI pipeline is paramount and arguably on par with any other enterprise. Data centers rely heavily on GPUs, which serve as the neural center of AI computing systems. The process heavily relies on TSM's exceptional manufacturing processes and the semiconductors that it produces for its client companies.

TSMC’s chief executive officer, C.C. Wei, foresees the company’s AI-centric chip revenue to expand at a CAGR of 50%. By 2027, he projects AI chips to make up a high-teens portion of the company’s revenue.

With its operations well-suited to leverage the ongoing AI wave, TSM’s stock has surged more than 57% over the past six months. Positioned firmly with a proven track record of success, strategic investments, and a flourishing market for AI-based chips, TSM presents an appealing opportunity for investors seeking substantial returns.

Rivian (RIVN) vs. Tesla (TSLA): Can the EV Underdog Match the Giant's Success Story?

Posted on by The INO.com Team

Tesla, Inc. (TSLA) accomplished what many believed to be an impossible feat by establishing itself as a prominent electric vehicle (EV) manufacturer entirely from scratch. This achievement positioned Tesla to challenge and compete with major players in the automotive industry.

Rivian Automotive, Inc. (RIVN) shares similar aspirations, aspiring to emulate TSLA’s success. However, investors eagerly anticipating Rivian’s potential to replicate Tesla’s trajectory must closely monitor whether Rivian can address significant challenges in 2024.

Establishing an automobile manufacturing company is particularly challenging due to its capital-intensive nature. This endeavor involves building extensive manufacturing facilities, procuring expensive materials, hiring a substantial workforce, and investing significant time in coordination.

Moreover, navigating regulatory requirements, especially concerning vehicle safety, adds another layer of complexity, as obtaining approvals for road-ready automobiles necessitates stringent compliance measures. Thus, the process of building an automobile manufacturer is not only laborious but also requires substantial financial resources and regulatory adherence.

It took TSLA several years before it could generate consistent profits, a milestone the company reached in 2020. Starting in 2014, Tesla experienced a notable increase in net losses, accompanied by a rise in research and development (R&D) expenses. The electric carmaker, founded in 2003, finally posted its first full year of net income of $721 million in 2020, in contrast to prior losses.

However, during this period, Tesla didn’t face significant competition in the EV market, making it the primary choice for consumers interested in EVs. This relatively unchallenged position allowed Tesla to focus on building its brand and technology without immediate pressure from its dominant peers.

In contrast, RIVN faces a more daunting challenge as it strives to achieve profitability in a market with more players and a competitive landscape different from TSLA’s early years. This means that Rivan’s journey to success is not only challenging and costly but also happening in a market environment that demands strategic adaptation and innovation.

Is Rivian on the Path to Becoming the Next Tesla?

RIVN has made significant strides toward establishing itself as a major player in the EV industry, boasting infrastructure capable of supporting its planned 2024 production target of approximately 57,000 vehicles. For the full year 2023, the company produced 57,232 vehicles and delivered 50,122, surpassing the management’s 2023 production guidance of 54,000 vehicles.

As Rivian’s production and manufacturing progress improved throughout the last year, it showcased its capacity as a legitimate automaker. Moreover, on March 7, 2024, the auto company introduced R2, R3, and R3X product lines built on its new midsize platform.

The launch of new products, including R2 and R3, designed to embody the company’s performance, capability, usability, and affordability, can bring it an expanded market reach, drive higher sales volumes, and offer a competitive edge. Rivian’s design and engineering teams are highly focused on innovating not just the product features but also its approach to manufacturing to achieve substantially reduced costs.

Despite this, Rivian still lags far behind Tesla in a critical investor metric: profitability. Rivian is far from achieving profitability, with its losses significantly exceeding those incurred by Tesla during its initial stages of developing its EV business.

In 2023, while generating substantial revenue of $4.40 billion, Rivian incurred a staggering cost of sales totaling $6.40 billion. This means that Rivian incurred losses for every EV it sold, highlighting an unsustainable business model that requires addressing for long-term viability.

The company reported a net loss of $1.52 billion for the fourth quarter that ended December 31, 2023. The last quarter of 2023 reflected a greater discrepancy between production and deliveries compared to previous quarters and recorded a 10% fall in deliveries.

Also, the company has been burning through cash to ramp up production of its product lines. As of December 31, 2023, RIVN’s cash and cash equivalents stood at $7.86 billion, compared to $11.57 billion as of December 31, 2022. Its cash burn comes at a time when demand for EVs has slowed, with Tesla CEO Elon Musk warning that high interest rates are making cars unaffordable.

“We firmly believe in the full electrification of the automotive industry, but recognize in the short-term, the challenging macro-economic condition,” said RJ Scaringe, Founder and CEO of Rivian.

Elon Musk further made remarks about RIVN’s product design, acknowledging its merit but emphasizing the company’s challenge of scaling up production while maintaining positive cash flow. He pointed out that his rival could face the risk of bankruptcy within six quarters unless significant cost reductions are implemented.

Musk emphasized the urgent need for massive cost-cutting measures to ensure the RIVN’s survival in the competitive automotive market.

Challenges Lie Ahead for Rivian in 2024

RIVN’s outlook for 2024 is influenced by economic and geopolitical uncertainties, particularly the impact of exceptionally high-interest rates. The company plans to maintain its production target at 57,000 vehicles, consistent with 2023 levels. For the full year, Rivian anticipates significant capital expenditures of $1.75 billion and an adjusted EBITDA loss of $2.70 billion.

Amid mounting losses and an increasingly competitive EV market, RIVN announced in February that it would lay off 10% of its salaried workers. Previously, on two different occasions, the EV maker laid off about 6% of its workforce in an effort to reduce its losses.

“Our business is facing a challenging macroeconomic environment — including historically high interest rates and geopolitical uncertainty — and we need to make purposeful changes now to ensure our promising future,” chief executive RJ Scaringe wrote in an email to employees.

Rivian’s cash burn is one of the primary challenges for the company. Its cash burn is unsustainable as it expands R2 and R3 capacity, prompting management to announce a reduction in capital expenditures, specifically in Georgia. Last month, Rivian announced that it would be pausing the construction of its $5 billion manufacturing plant in Georgia to cut down costs.

CEO RJ Scaringe said that production of the R2 will begin at RIVN’s existing plant in Normal, Illinois. While presented as a cost-saving initiative, the decision raises concerns regarding the company's ability to manage its operations effectively.

Bottom Line

RIVN has made significant strides in establishing itself as a major player in the EV industry. The company’s infrastructure supports its ambitious production targets, and the introduction of new product lines like R2 and R3 showcases its commitment to innovation and market expansion. These moves can potentially drive higher sales volumes and enhance its competitive edge.

However, Rivian faces substantial challenges, particularly in achieving profitability. Despite generating decent revenue, the company’s cost of sales has resulted in significant losses, raising questions about the sustainability of its business model. The company’s cash burn is a pressing concern.

While Rivian has shown promise in its technological advancements and product offerings, its path to profitability and long-term viability hinges on its ability to address its cost structure, manage cash flow effectively, and navigate a challenging macroeconomic environment in the EV industry, including high interest rates, supply chain disruptions, and intensified competition.

So, it’s crucial to emphasize that investors should focus on Rivian’s execution toward profitability in 2024. While a shift from losses to profits is significant, consistent progress toward that turning point will determine Rivian’s potential to match Tesla’s success. Investors should also closely monitor Rivian’s efforts to improve operational efficiency and manage costs effectively.

If Rivian can demonstrate steady progress toward profitability, there’s still a chance it could match its rival Tesla’s some of the success achieved. However, given its massive losses, alarming cash burn, and an uncertain outlook, it could be wise to approach RIVN with caution for now.

FedEx's Bullish Move: $5 Billion Stock Buyback Plan Ignites Investor Enthusiasm

Posted on by The INO.com Team

FedEx Corporation (FDX), a leading provider of transportation, e-commerce, and business services, plans to repurchase $5 billion worth of its shares as its cost-cutting measures contribute to increased profits, leading to a significant surge in the company's stock, marking its most substantial gain in a year.

FDX’s shares have soared more than 18% over the past month and nearly 30% over the past year.

This newly authorized $5 billion share repurchase program comes in addition to the existing $600 million available for repurchase under the 2021 authorization. During the third quarter of fiscal 2024, the courier company completed a $1 billion accelerated share repurchase (ASR) transaction. About 4.1 million shares were delivered under the ASR agreement.

FedEx also intends to repurchase an additional $500 million of common stock during the fourth quarter, bringing the fiscal 2024 buyback total to $2.5 billion. The company’s cash on-hand was $5.60 billion as of February 29, 2024.

“DRIVE is having a real impact, supporting both operating income growth and margin expansion,” said John Dietrich, FDX’s executive vice president and chief financial officer. “As we look ahead, we’re focused on continuing to deliver on DRIVE and our commitments to support long-term shareholder returns.”

Third-Quarter Earnings Beat

For the third quarter ended February 29, 2024, FDX reported revenue of $21.74 billion, slightly missing the analysts’ estimate of $22.08 billion. Despite lower revenue, third-quarter income and margin improved, mainly due to the execution of the company’s DRIVE program and the continuous focus on revenue quality.

FedEx’s non-GAAP operating income grew 16.2% year-over-year to $1.36 billion. Its non-GAAP net income came in at $966 million, an increase of 11.7% year-over-year. The company posted a non-GAAP EPS of $3.86, compared to the consensus estimate of $3.48 and up 13.2% from the previous year’s quarter.

“FedEx delivered another quarter of improved profitability in what remains a difficult demand environment, reflecting outstanding service and continued benefits from DRIVE,” said Raj Subramaniam, FDX’s president and CEO.

“We are making meaningful progress on our transformation, while strengthening our value proposition and improving the customer experience. I've never been more confident in our path ahead as we build a more flexible, efficient, and intelligent network,” Subramaniam added.

Cost-Cutting Efforts

Over the past year, workforce reductions at FedEx totaled around 22,000 jobs, said CFO John Dietrich on a conference call with analysts. As per the company, most of these job cuts have come through attrition.

For the full-year fiscal 2024, FDX plans to reduce its planned capital spending to $5.4 billion, compared to the previously announced $5.7 billion. The logistics company expects permanent cost reductions related to the DRIV program of $1.8 billion in 2024.

In April last year, FedEx announced restructuring its business segments into one unit, embarking on a cost-cutting plan of $4 billion by 2025. The shipping giant expects the new operating structure to be entirely implemented by June 2024, bringing FedEx Express, FedEx Ground, FedEx Services, and other FedEx operating companies under the Federal Express Corporation umbrella.

Meanwhile, FDX’s Board of Directors approved an increase of 10% in its annual dividend of $0.44 per share to $5.04 for the fiscal year 2024. Its annual dividend translates to a yield of 1.78% at the prevailing share price. Moreover, the company’s dividend payouts have grown at a CAGR of 14.2% over the past five years.

Bloomberg Intelligence analyst Lee Klaskow said, “FedEx gave investors plenty to celebrate especially as it relates to showing progress towards reducing structural costs and its announced $5 billion share repurchase program.”

Bottom Line

Despite a challenging demand environment, FDX delivered another quarter of enhanced profitability, reflecting outstanding service and continued benefits from its DRIVE program. FedEx’s Board of Directors also announced a new $5 billion share repurchase program as a continued cost-saving initiative to help drive profits.

FedEx's ambitious stock buyback plan is a testament to the company's confidence in the effectiveness of its cost-cutting initiatives and restructuring efforts, potentially suggesting optimistic long-term growth prospects.

TD Cown analyst Helane Becker said in a research note that the last reported results marked the third consecutive quarter in which FDX’s operating income grew despite dropping revenue, indicating the logistics company’s cost-cutting efforts are working.

FedEx CEO Raj Subramaniam currently oversees a comprehensive restructuring of the company’s delivery networks. A significant part of this strategic plan has involved reducing the workforce by tens of thousands of jobs. The restructuring plan, announced in April last year, represents a departure from founder Fred Smith’s long-standing strategy of maintaining a two-network approach.

“We are making meaningful progress on our transformation,” Subramaniam said. The overhaul plan (DRIVE program) is expected to make permanent cost reductions of $1.8 billion in fiscal 2024.

The results from the plan demonstrate FedEx’s efforts to revitalize its Express division, which has faced challenges due to the shift by consumers and businesses toward sending more mail and packages via ground. FedEx reported that both its Express and Ground divisions saw considerable benefits from lower structural expenses during the quarter.

On March 22, 2024, Evercore ISI analyst Jonathan Chappell maintained a Buy rating on FDX and set a price target of $351. In addition, FedEx got a Buy rating from Deutsche Bank’s Amit Mehrotra.

Based on the recent insider activity of 48 insiders, corporate insider sentiment is optimistic about FDX stock. Over the past year, there were about 32 open market insider buys. Most recently, in January this year, Richard W. Smith, President and CEO of Airline and International, FedEx, bought 2,000 shares for a total of $287,080.

Given its outstanding financial performance and bright growth prospects, investing in FDX for potential gains could be wise.

To Buy or Not to Buy: Decoding Neutral Rating on Boeing (BA) Stock

Posted on by The INO.com Team

Last week, BofA Securities analyst Ronald Epstein lowered his price target from $225 to $210 on The Boeing Company (BA) stock. The analyst also maintained a Neutral rating on the stock after a presentation by the aerospace giant’s Chief Financial Officer and Executive Vice President, Brian J. West. The presentation occurred last Wednesday at the Bank of America Global Industrials Conference.

Boeing’s Near-Term and Medium-Term Outlook

Brian West’s recent presentation hinted at potential shifts in Boeing’s cash flow and debt structure, as highlighted by BofA Securities. Due to the company’s decision to retain airplanes for a longer duration and comprehensively address traveled work, BA anticipates a negative impact on revenue, earnings, and cash flows for both the quarter and the year.

During the quarter, Boeing’s free cash flow usage is projected to be between $4 billion and $4.50 billion, higher than its initial January estimates. This increase in cash outflow is driven by lower deliveries, reduced volume at Boeing Commercial Airplanes (BCA), and a negative mix from inventory airplanes.

Additionally, some working capital pressures, including inventory challenges and receipt timing, will affect the aviation company’s financial performance in the short term and may not fully recover by the end of the year. 

Boeing has not been able to effectively address near-term financial outcomes due to the work surrounding its stability.

West added in the presentation that BA’s long-term strategy prioritizes generating cash flow post-investments in its growth initiatives, followed by reducing debt on its balance sheet. Maintaining an investment-grade rating remains a key priority.

Although achieving the targeted $10 billion free cash flow will take longer than initially anticipated, likely extending into the 2025-2026 timeframe, the company believes its current actions will enhance our long-term positioning and stability.

Moreover, Boeing's defense business is also a focal point of concern. Previously, in October, West expressed confidence in the defense segment’s contribution toward achieving the $10 billion free cash flow target, albeit slightly lower than expected.

However, acquiring Spirit AeroSystems Holdings, Inc. (SPR) is expected to raise Boeing’s consolidated debt, which currently stands at $52.30 billion, potentially leading to heightened cash flow challenges. Spirit has faced outflows in recent years, and there is also a need to enhance manufacturing quality.

Bottom Line

BA’s fourth-quarter 2023 results beat analysts’ expectations. For the quarter that ended December 31, 2023, Boeing’s revenue came in at $22.02 billion, surpassing analysts’ estimate of $21.08 billion. This compared to revenue of $19.98 billion in the same quarter of 2022.

BA’s core operating earnings were $90 million, compared to a core operating loss of $642 million in the prior year’s quarter. The company also posted a core loss per share of $0.47, compared to the consensus estimate of $0.79, and narrowed 73.1% year over year. However, its free cash flow came in at $2.95 billion, down 5.8% from the previous year’s period.

Despite topping analyst estimates in the last reported quarter, the aerospace company holds off on its 2024 guidance as it grapples with the fallout from an accident involving an Alaska Airlines 737 Max 9, which suffered a door “plug” blowout during a flight in early January.

“While we often use this time of year to share or update our financial and operational objectives, now is not the time for that,” Boeing CEO Dave Calhoun said in a message to employees. “We will simply focus on every next airplane while doing everything possible to support our customers, follow the lead of our regulator and ensure the highest standard of safety and quality in all that we do.”

Further, BA CFO Brian West recently spoke at the Bank of America Global Industrials Conference, where he reassessed the company’s medium-term and long-term financial outlook and strategic decisions and hinted at several concerning factors.

West talked about the anticipated negative impact on revenue, earnings, and cash flows for the quarter and the year due to the company's decision to retain airplanes longer and address traveled work comprehensively. He added that the increase in cash outflow in the quarter is attributed to fewer deliveries, decreased volume at BCA, and an unfavorable mix of inventory aircraft.

Moreover, working capital pressures, including inventory challenges and receipt timing, are expected to persist in the short term and may not be fully recovered by the end of the year, leading to a lower full-year free cash flow projection.

Despite challenges in managing near-term financial outcomes due to stability concerns, the company is committed to strengthening its position, achieving long-term targets, and enhancing predictability for our customers and investors. However, this process will require time and concerted efforts.

The recent presentation highlighted several challenges, including anticipated adverse impacts on the company’s cash flow and debt profile. Given the current circumstances, BofA Securities’ decision to revise the price target on BA stock and adopt a cautious stance with a “Neutral” rating seems justified.

Therefore, waiting for a better entry point in this stock could be wise now.