Why Boeing's Stock Remains a Buy Despite Mixed Results

Boeing's (BA 0.25%) recent results highlighted the case for the stock but perhaps not in the way many investors might think. In truth, they were mixed. However, Boeing's management has conservatively guided expectations, and the stock's valuation is such that merely meeting its medium-term guidance leaves Boeing stock looking like a good value at the moment. 

Boeing's mixed quarter 

To understand the importance of each segment to Boeing's 2025/2026 goals, it's a good idea to go back to the investor conference in November. Back then, management outlined expectations for segment operating cash in 2023 and in 2025/2026 (meaning between the two years).

Most of the heavy lifting will be done by the commercial airlines (BCA) segment as it executes against its multiyear backlog -- more on that in a moment. However, to hit the 2025/2026 target, Boeing will also need to generate significant improvement in its defense, space & security (BDS) segment.

Data source: Boeing presentations. 

The good news from the quarter and management's outlook is that strength in BCA and the global services (BGS) segment is offsetting weakness in BDS. That's good and bad, depending on how you look at it. 

This dynamic was expressed in CFO Brian West's commentary on the second-quarter earnings call. He expressed his confidence, as did CEO Dave Calhoun, that Boeing will hit its free-cash-flow target of $3.5 billion to $5 billion in 2023. Still, he also noted that "The operating cash makeup by division will likely be different with BCA and BGS better than expected and BDS lower than expected due to the lower operating performance."

Good news for Boeing

The glass-half-full view takes heart that Boeing is on track to hit its targets, mainly as airplane production appears to be ramping up as planned. For example, BCA expects to deliver 400 to 450 of its 737 MAX airplanes in 2023, moving to a rate of 50 a month in 2025/2026. The good news is Boeing delivered 103 in the quarter, meaning a rate of roughly 34 a month, and West said: "We are now transitioning production to 38 per month and still plan to increase to 50 per month in the '25-26 timeframe." 

This is the most critical part of Boeing's business, as the company's profit margin tends to expand as production volume grows. 

Bad news for Boeing

The glass-half-empty view points out that the risk is rising because BDS continues to suffer what Calhoun describes as "continuing losses on three fixed-price development programs." As previously discussed, Boeing has had multibillion-dollar cost overruns on these projects, and working through these programs is a key to derisking the stock and increasing profits and cash flow at BDS.

Management believes it will pass through milestones on these fixed-price programs and derisk them by 2025/2026 and that they are only 15% of its defense business. Still, that needs to be executed, and Boeing's track record is patchy. As such, if anything happens to the commercial aerospace market, Boeing won't have much to fall back on from BDS over the next few years. 

Image source: Getty Images.

A stock to buy?

Boeing stock is worth buying, but it's not as strong a buy after seeing the latest earnings. Boeing is ramping up commercial airplane production -- that's a significant plus. It also has a management, and an impressive board of directors, that understand what investors need right now -- a cautious approach to guidance and solid execution. However, the ongoing issues at BDS are a problem, increasing the company's investment risk.

Boeing must meet its cash-flow expectations for 2025/2026, not only to be able to reduce its $52.3 billion in debt but also to have the financial firepower to invest in developing future aircraft and compete with Airbus.

Risk is rising, and Boeing is a bit less of a buy after these results, but on a risk/reward basis, I think the argument still favors the bulls on this stock.