Managing investor expectations is always crucial in management's job, and it's even more critical at a beleaguered company like Boeing (BA -0.13%). So management's subdued commentary on its last earnings call is probably good in that context. Boeing doesn't need to shoot the lights out regarding production ramps or guiding investors toward bumper profits. Instead, it needs to regain investors' confidence by underpromising and overdelivering quietly, and the second-quarter earnings call may just be the start of that.
Where Boeing has come from
The aircraft manufacturer has endured a very challenging few years rife with operational mishaps, significant cost overruns, multi-billion dollar charges in its defense programs, management upheavals, customer criticism, program delays, the 737 MAX grounding, COVID-19 lockdowns, the Federal Aviation Administration (FAA) enforced halt to 787 (Dreamliner) production, and the ongoing difficulty of ramping 737 production in the face of continuing supply chain challenges in 2022. The list seems endless.
Regarding the latter, CEO David Calhoun has been forthright in telling the market that the issues would extend at least into 2023 and possibly late into the year.
Of course, if you're an investor or even considering becoming an investor in Boeing, you'll want to hear that these issues are being resolved. And that's where the magic word "if" kicks into the matter. The case for buying Boeing rests on the idea that if it can slowly resolve these issues over time, it has an opportunity to significantly increase profits as the commercial aviation market recovers to 2019 levels of activity by 2023/2024.
Moreover, given that Boeing generated $14.1 billion in earnings before interest, taxation, depreciation, and amortization (EBITDA) and $13.7 billion in free cash flow (FCF) in 2018 (the year before the 737 MAX was grounded), it's reasonable to expect something close to that over time. And "if" Boeing can get anywhere near those levels, the stock will look cheap given that the current market cap is just $100 billion.
What Boeing needs to do
It's not hard to see what Boeing needs to do to get back to something approaching its former glories. Outside of avoiding more significant problems with its defense business, it centers on three major commercial aircraft programs. At the time of the earnings, the following applied:
- Get FAA clearance to resume deliveries of the 787 and then increase production.
- A production ramp (currently 31 a month) on the 737 MAX and certification for the 7373 MAX 10 (a larger variant intended to compete with Airbus' popular 321neo aircraft).
- Move toward the first delivery (now scheduled for 2025) of the 777X, Boeing's upgrade to its successful 777 aircraft.
What management said
Calhoun made pretty conservative statements/projections on these three issues. For example, he said Boeing was "on the verge" of getting a return to 787 deliveries but wouldn't give a date. For reference, the FAA did approve Boeing's plan to resume 787 deliveries just a few days after Boeing gave earnings and the stock rose sharply in response.
That's a sign that investors will buy into the stock if Boeing manages to de-risk itself from the issues discussed above.
Turning to the production ramp on the 737 -- a significant issue because of its importance (3,431 airplanes in backlog) and that Boeing's margin tends to increase with volume increases -- management again took a cautious line. Calhoun said Boeing aimed to stabilize at 31 a month and then have "confidence that engine suppliers will have their castings in order" before predicting a delivery rate of 38 a month.
He also noted, "If I thought I had an engine supply, I'd do it today," meaning ramping the 737 production rate. One of the issues is encouraging suppliers to invest in increasing production, which will require them to believe "in our demand forecast, which, so far, I think we've been highly credible with respect to the long-term demand forecast for airplanes."
Furthermore, when asked about the margin expansion that typically comes after a production ramp (on both the 737 MAX and 787), CFO Brian West agreed there would be one, but "the margin rate is going to go up. I can't predict the number. I won't predict the number."
What it all means to Boeing investors
Boeing's management is doing all it can to manage investor expectations modestly. It's all a far cry from former CEO Dennis Muilenburg's approach. That's probably a good thing, given the company's recent history of disappointments, and it may help rebuild a lot of lost credibility. Management didn't generate any big news on the earnings presentations, but Boeing has the potential for positive news flow in the coming years. That might be just the combination investors need.