It's been a disappointing year for Boeing(NYSE: BA) shareholders, as the company's operational performance hasn't met expectations. Still, despite the bad news, there's an investment case for the stock for value investors. But is it enough to justify buying the stock? Here's the lowdown.
What Boeing investors expected from 2023
Going into the year, investors in Boeing were hoping the company would mark progress in its medium-term aims outlined at its investor conference in November 2022. The key objective stands at hitting $10 billion in free cash flow (FCF) in the 2025 to 2026 time frame. That kind of FCF will help Boeing reduce its considerable debt (currently $52.3 billion). In addition, given that Boeing's market cap now stands at $110.5 billion, it's not difficult for value investors to pencil in a price-to-FCF multiple of 11 times FCF by 2026 and conclude that the stock is an excellent value. Boeing still commands a formidable business moat and a multiyear backlog of orders.
However, it's one thing to pencil in $10 billion, and it's another thing to believe Boeing will hit the figure. Two things that would have given investors confidence come from achieving two critical things in 2023:
- Hitting its target of 400 to 450 deliveries of its 737 MAX airplanes as it begins the long march to ramping production from 31 a month at the start of the year to a rate of 38 a month and then 50 a month in 2025/2026.
- No more multibillion-dollar charges on problematic fixed-price defense contracts while it works through them and returns Boeing defense, space, and security (BDS) to profitability over time.
Unfortunately, the aircraft manufacturer will not achieve either in 2023.
Boeing's tough year
First, as previously discussed, Boeing came under pressure to meet its 737 MAX delivery target for 2023 due to the need to fix a manufacturing issue on fuselages supplied by Spirit AeroSystems. As such, it didn't come as much of a surprise to hear management downgrade its target from 400 to 450 deliveries to a new range of 375 to 400.
Second, the issues in defense are ongoing. For example, Boeing reported a $482 million charge on the VC-25B (Air Force One) fixed-price development program in the third quarter, a $315 million loss in connection with a satellite contract, and "material cost pressures across a couple of programs totaling $136 million primarily driven by the MQ-25 program" (Stingray aerial refueling drone), according to Boeing's CFO, Brian West, on the earnings call.
West conceded "this performance is below our expectations, and we acknowledge that we aren't as far along in this recovery as we expected to be at this stage."
A quick look at each segment's profits and margins so far this year shows the extent of the problem in defense.
First Nine Months
Boeing Commercial Airplanes
Boeing Defense, Space & Security
Boeing Global Services
Three reasons why Boeing is still a value stock
It's been a frustrating year. Still, it's worth noting that the stock is only down 4.1% this year as I write. That's probably because the valuation was cheap enough to withstand some disappointment, a classic value situation.
It's arguably still a good value for three interconnected reasons. First, management maintained its target of $3 billion to $5 billion in FCF for 2023. While you could drive a bus through that range, it's fair to say that it set that range while believing it could still hit the $10 billion in 2025/2026 FCF target even if it hit the low end of the $3 billion to $5 billion range in 2023.
Second, as CEO Dave Calhoun noted on the earnings call, the issue on the 737 MAX deliveries is not a supply chain constraint; it's a manufacturing quality issue -- something that suggests when it's fixed, Boeing can ramp production in line with its targets. Moreover, Boeing and Spirit have come to an agreement that helps the latter financially and reduces the risk that it won't supply fuselages on time.
Third, the defense issues are problematic, but the MQ-25, VC-25B, and KC-46 tanker (another high-cost program) are set to pass through key milestones next year.
A stock to buy?
Value investors will appreciate that Boeing's stock still looks a good value, and all it will take is a few good quarters of execution, and it could be materially higher.
However, many investors will want to see the company's guidance for 2024. Management has already said FCF will likely be higher in 2024, but recall that it also said FCF will come in toward the low end of the 2023 range. In addition, the fact that the stock has only fallen 4.1% this year, yet the risk around its medium-term guidance has risen means it's less of a good value than previously on a risk/reward basis. As such, a little patience before buying in is probably the best course here.
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