Boeing (BA 1.09%) just released its latest earnings report and there were two key takeaways regarding the aerospace giant:
- There isn't going to be a quick fix to Boeing's problems.
- Investors need to focus on long-term developments in the commercial aerospace industry if they decide to hold on to the stock.
Let's look at what's happening with the company and what could be the critical consideration you need to make if you are considering buying the stock.
Boeing's long-term plans
It's no secret that CEO Dave Calhoun is being cautious about Boeing's guidance and strategy. This is undoubtedly an approach backed by the heavyweight board of directors that Boeing has assembled over the last few years. In the last three years, Boeing added board members:
- Dave Gitlin, the former president of Collins Aerospace
- Akhil Johri, the former CFO of United Technologies
- David Joyce, the former CEO of GE Aviation
- Lynne Doughtie, the former CEO of KPMG
In concert with Calhoun, the board likely accepted and acted on the criticisms aimed at former CEO Dennis Muilenburg and his overly optimistic projections. It concluded it was time to take a more measured approach. As such, Calhoun is asking investors to look toward the long term in setting a target of $10 billion in free cash flow (FCF) at some point between 2025 and 2026. The crucial part of the plan involves increasing free cash flow (FCF) from $3 billion to $5 billion in 2023.
An integral part of the plan involves Boeing Commercial Airplanes (BCA) ramping up production of its 737 airplanes -- from 400-450 in 2023 -- and hitting a rate of 50 a month (600 total) in 2025/2026. This ultimately would lead to an increase in BCA FCF of $6 billion from 2023 to 2025/2026.
Meanwhile, Boeing Defense, Space & Security (BDS) is expected to increase its FCF by $2.7 billion as it transitions through some problematic fixed-price contracts that have caused multibillion-dollar charges and costly delays.
The ride won't be without turbulence
It makes good sense to have investors focus on the longer-term prize because Boeing continues to suffer near-term hiccups. As outlined above, the operational keys to Boeing hitting its targets are a successful production ramp-up on the 737 program -- (Boeing tends to expand profit margins as it ramps up production) -- and avoiding any more mishaps on its defense programs. But unfortunately, here's what happened in the first quarter.
Image source: Getty Images.
First, the 737 program's fuselage supplier, Spirit AeroSystems, alerted Boeing that it had incorrectly installed two fittings on the fuselages it supplied. As such, Boeing needed to inspect and rework the planes, leading to near-term delivery shortfalls on the 737.
Second, Boeing took $245 million in pre-tax charges for a previously disclosed supplier quality issue on the center fuel tank of the KC-46 tanker program. This is a fixed-price defense program that's suffered multiyear delays and over $7 billion in charges.
In other words, two things that investors didn't want to see happen happened.
What it means for investors
The excellent news is that Boeing is sticking to the target of 400-450 deliveries of 737s for 2023, and there's no change to either the 2023 or 2025/2026 guidance. Meanwhile, the charges on the KC-46 tanker aren't as large as many had feared.
The bad news is that the pressure is building on the 737 delivery schedule. CFO Brian West said the "first half monthly average will be about 30 airplanes per month," while "second half deliveries are expected to be around 40 per month, with sequential quarterly improvement in the back half." Any more mishaps and that aggressive target could be challenged.
Image source: Getty Images.
What Boeing investors should focus on
Investors should focus on the 2025/2026 target because management doesn't expect "significant supply chain improvement until well into 2024." So don't be surprised if there are more issues to come in the near term.
The real question at Boeing is probably whether it can invest cash in developing a new airplane. Calhoun has previously intimated that there won't be a new airplane until the middle of the next decade. Since Boeing's debt currently stands at $55 billion, using cash flow to reduce this debt is a priority.
All told, investors should monitor developments in the industry as much as they follow Boeing's cash-flow progression. For example, let's say Airbus starts to grab market share in the mid-range market (in between the narrowbody and widebody market), possibly with the Airbus A321XLR.Then Boeing will come under pressure to accelerate plans to develop a new plane. That might not be easy to do if Boeing still has a lot of debt to service.
Those considerations are a few years ahead, and Boeing stock looks attractive now. It's weathered the bad news this year, and Calhoun's conservatism has encouraged investors to look realistically at matters. As such, the stock remains attractive, even if the pathway to 2025/2026 and $10 billion in FCF is likely to prove bumpy.
