There's no point in sugarcoating matters. It's been a disappointing year so far for Boeing(NYSE: BA), and the fact that the stock is still up 11% in 2023 is more a marker of how low investor expectations were going into the year than a vote of confidence in developments this year. That said, there's still a compelling case for the stock. Here's a look at the updates from CFO Brian West's recent presentation at the Jefferies Industrial Conference and what they say about the investment proposition for the stock.
The investment case for Boeing stock
Management set out its stall at its investor conference in November of 2022, making it clear that generating free cash flow (FCF) was its key aim in the coming years -- not least to reduce its debt load and put it in a financial position to potentially invest in developing a new airplane, maybe in a decade.
The headline targets given in November called for $3 billion to $5 billion in FCF in 2023 and $10 billion at some point between 2025 and 2026, compared to $2.3 billion in 2022. The key drivers of that improvement and what investors need to follow are:
- At Boeing Commercial Airplanes (BCA), a production increase on the 737 from an estimated 400 to 450 deliveries in 2023 to a rate of 50 a month in 2025/2026 (implying an annual rate of 600 a year).
- At Boeing Defense, Space & Security (BDS), overcoming supply chain difficulties, derisking problematic fixed-price programs, returning BDS to profitability, and generating $2 billion in operating cash flow in 2025/2026.
Unfortunately, performance on both ongoing objectives has been disappointing this year, and West's presentation called attention to that.
Boeing's CFO at the Jefferies conference
The key points from the recent presentation at the conference:
- Discussing the target of 400 to 450 737s delivered, West expects them "to be at the low end of that range, and there will be puts and takes as we learn more."
- Third-quarter 737 deliveries "will be about 70". The decline in output is attributed to needing to fix a recently identified manufacturing issue on fastener holes on the fuselages Spirit AeroSystems supplied.
- The company continues to face significant supply chain and labor problems at BDS.
- BCA and BDS profit margins will be negative in the third quarter.
For reference, this is the second time this year Boeing has suffered problems and delivery delays due to issues on Spirit supplied fuselages, and the problems are a sign of the difficulties of ramping up 737 production. Furthermore, West's estimate of 70 deliveries of 737s in the third quarter puts even the low end of the full-year guidance under pressure, and it may well lead to the company missing the low end of its full-year range.
Third Quarter (Estimated)
What's Needed in the Fourth Quarter
Boeing 737 Deliveries
While it doesn't make sense to buy and sell Boeing stock based on delivery delays in a quarter or two, the problems illustrate the challenges facing the company. A successful production increase on the 737 is critical to Boeing meeting its 2025/2026 aims because it's the key to growing profit margins.
Boeing Defense, Space & Security
Turning to BDS, during the second-quarter earnings call in July, West spoke of the BDS roadmap in terms of three buckets. He said that the bulk of the business, around 60%, is doing fine, and the aim is to keep it stable and try to make some productivity improvements. The next 15% is the problematic fixed-price programs management is trying to work through and have largely derisked by the end of 2024. The final 25% consists of legacy programs that "are not where they need to be. They are negative" according to West in July.
Fast-forward to the recent conference, and West said the 25% was "proving to take longer" to get back on track. Meanwhile, "We also have 15% of the revenue base, which is fixed-price development contracts that has new pressure, and we need to address it."
Where next for Boeing?
The stock is still attractive based on its 2025/2026 targets, but the latest news is disappointing. It also casts doubt on Boeing hitting its 2023 targets -- something that should concern investors. If it can't meet its targets now, then investors should wonder if Boening can meet its medium-term targets as well. Investors should look closely at third-quarter earnings and the updated guidance. The stock remains attractive, but don't be surprised if there's more bad news from Boeing in 2023.
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