Defense, aerospace, and space giant Boeing (BA -0.14%) scored a long-awaited win on Nov. 16, when the Boeing-built Space Launch System successfully lifted off from Kennedy Space Center on a long, looping trip out past the moon and back.

The space mission, dubbed Artemis 1, won't wrap up until the spacecraft it launched -- Lockheed Martin's Orion -- returns to Earth on Dec. 11. Just halfway through the mission, though, Artemis 1 scored a PR success for NASA and for Boeing, snapping a photo from its greatest distance -- a quarter million miles from Earth -- that space fans are calling "iconic."    

Artemis 1 spacecraft with moon and Earth in the background in space.

Image source: NASA.

If only all of Boeing's ventures were so successful.

Boeing is a big company with many moving parts, and it's still working its way through a turnaround, as CEO Dave Calhoun admits. Some of the company's troubles weren't Boeing's fault, such as the cratering of commercial airplane demand caused by the pandemic, and the difficulties ramping production back up as travel demand returns. Other troubles were self-inflicted, such as Boeing's missteps with its two most important new airliners, the 787 Dreamliner and more recently the 737 MAX.

Arguably Boeing's biggest mistake, though, was its decision to bid too low on several high-profile, fixed-price government defense and space contracts -- ensuring Boeing won the contracts, but making it difficult for Boeing to earn profits on them.

This decision came home to roost in Boeing's recent Q3 2022 earnings report. On the one hand, it resumed 787 deliveries in Q3, and increased deliveries of 737s, helping the company to grow its revenue again (up 4% at $16 billion). On the other hand, Boeing suffered steep losses in its two biggest businesses: Commercial Airplanes and Boeing Defense, Space & Security (BDS).  

Boeing by the numbers

The revival of demand for commercial airplanes gave Boeing a 32% lift in sales for that business. Boeing still ended up losing $643 million in the commercial business, however.

Boeing's bigger problem was at BDS, where not only did Boeing's sales fall 20% year over year, but the formerly profitable segment swung to a huge $2.8 billion quarterly loss. KC-46A Pegasus refueling tankers, MQ-25 Stingray drone tankers, T-7A Red Hawk Air Force training jets, VC-25B Air Force One Presidential airplanes, and CST-100 Starliner commercial crew spacecraft -- Boeing bid fixed prices to deliver on each of these programs, and lost money on every one.

Bad news, good news

Now, not all the news was bad. At Boeing's third major business division, Global Services, revenue grew 5%, profit margin increased to a very respectable 16.5%, and total profits grew 14%. Even in the troubled BDS division, Calhoun characterized losses as related to the "development" stages of "maturing" its defense and space programs.

As Boeing straightens out its supply chain and shifts from development to production (and servicing, and upgrades), it's likely losses will slim in the defense programs, at least. (The Starliner program is of too limited duration, I fear, for Boeing to scale it up to a point where it will become profitable.)

In the meantime, it appears that Boeing must rely on its Commercial Airplanes division to lead its way out of turnaround mode and into recovery. The good news here is that with 787 and 737 deliveries picking up, Boeing was able to generate $2.9 billion in positive free cash flow in Q3. That's not too much less than what the company was averaging just before its 737 MAX program was grounded in 2019.

Valuing Boeing

In fact, if you run-rate $2.9 billion out across four full quarters, it's not unreasonable to think that Boeing might generate $11.6 billion in annual free cash flow (FCF) again in the not too distant future. That's about what it generated in 2017, according to data from S&P Global Market Intelligence, and Boeing might even manage a bit more, if it can break its bad habit of bidding too low on its defense contracts.

So what would this mean for Boeing stock, and for investors looking to buy it? Divided into Boeing's $104.5 billion market capitalization, $11.6 billion in annual free cash flow (whenever Boeing manages to reach that level) would give Boeing stock a price-to-FCF ratio of 9. Even without dividends, that would seem an attractive price at which to own Boeing stock -- but for one thing.

As my colleague Adam Levine-Weinberg pointed out in October, Boeing took on a boatload of debt during the pandemic, and its balance sheet is now brimming with $57.2 billion in debt, against only $14.3 billion in cash. Add the cash and back out the debt, and Boeing's enterprise value rises to $147.4 billion, giving the stock an enterprise value-to-FCF ratio of 12.7 (again, based on that hypothetical $11.6 billion in free cash flow that Boeing's not yet producing).

If you ask me, even that's not too much to pay for Boeing -- once it returns to pre-pandemic levels of free cash flow production. That will be the real issue, seeing how long it takes Boeing to get back in form, because the longer it takes for Boeing to get there, the less its stock is worth.

Stay tuned.