What happened
Share prices of aerospace and defense giant Boeing (BA -2.51%) declined 14.4% in September, according to data provided by S&P Global Market Intelligence. The drop was a reaction to CFO Brian West's disappointing presentation at the Jefferies Industrial Conference in early September. In a nutshell, the presentation highlighted the threats to Boeing's near- and medium-term guidance.
The two most essential things this airline stock can do to convince investors it's on the right track is to demonstrate it will hit its airplane delivery targets and overcome its margin issues in its defense business. Unfortunately, West's presentation raised doubts over both.
So what
Starting with the Boeing commercial airplanes (BCA) segment and focusing on its key 737 narrowbody, Boeing has a target of 400-450 deliveries of 737s in 2023, and its medium-term target is to reach a production rate of 50 a month at some point in between 2025 and 2026.
Unfortunately, West told investors he expects the company will hit the low end of the 2023 range. In addition, he told investors to expect about 70 deliveries of 737s in the third quarter, so by my calculations, Boeing needs to deliver 114-164 planes in the fourth quarter to hit its guidance range. Those figures, which imply a monthly rate of 38-55 deliveries, would be an ask at the best of times. However, they are even more questionable given the need to fix a manufacturing issue on fuselages being supplied by Spirit AeroSystems.
As for the ongoing issues in the Boeing space, defense & security (BDS) segment, West spoke of "new pressure" on some of its problematic fixed-price defense programs and problems ongoing on legacy defense programs. As such, both BCA and BDS are expected to have negative profit margins in the third quarter.
Image source: Getty Images.
Now what
The decline in stock price is pretty much investors bracing themselves for a potentially disappointing third-quarter earnings report coming up in a few weeks. Investors tend to price stocks based on management's guidance, and the failure to achieve the two things outlined above -- meet commercial near- and medium-term airplane delivery targets and overcome problematic issues on fixed-price defense programs -- implies a reduction in earnings expectations.
In this context, the stock price decline is understandable. That said, the decline has left the stock looking at a good value based on current guidance. So if Boeing can get the job done on both issues and convince investors it's still on track, then the stock has upside potential.
