There's little doubt that Boeing (BA 0.25%) will be in better shape at the end of next year, but the critical question is whether that improvement will be enough to take the sock meaningfully higher. Here's what you need to know about Boeing's 2024.
Boeing in 2024
Qualifying what I wrote above, there are three reasons Boeing is likely to end 2024 better than it did in 2023:
- Boeing is ramping up its commercial plane delivery rates on its critical programs (the 737 MAX and the 787 Dreamliner) and the rate should increase through 2024.
- The supply chain issues dogging the defense industry should continue to alleviate, and Boeing is set to pass through key milestones on its problematic fixed-price defense programs in 2024.
- Management is targeting $3 billion to $5 billion in free cash flow (FCF) in 2023, with FCF growing in 2024 as Boeing marches toward $10 billion in FCF between 2025 and 2026.
Boeing will likely achieve all of these things in 2024, and a snapshot of the company in a year will show significant improvement over the one taken now.
Will it be enough to make Boeing stock a buy?
We know Boeing will improve, but will it be enough to keep the company on track with its medium-term aim to hit the $10 billion FCF target? Boeing's current market cap is $141.7 billion as of this writing, and if it stayed that way, Boeing would trade at just 14.1 times FCF in 2025/2026, provided it hits its target.
That said, all three factors discussed above have disappointed investors in 2023 and could do so again next year.
First, the current guidance range of $3 billion to $5 billion regarding FCF is the same as at the start of the fiscal year. Still, thanks to lower-than-expected airplane deliveries, management expects it to come in "toward the low end of the free cash flow range," according to CFO Brian West on the last earnings call.
As such, the improvement in FCF that management expects for 2024 could be as low as, for the sake of argument, $3.1 billion. The point is that Boeing's FCF in 2024 could call into question the feasibility of the bridge to $10 billion in 2025/2026.
Image source: Getty Images.
Second, and returning to the issue of why FCF will be at the low end of guidance in 2023, there's no guarantee that Boeing will get back on track with deliveries of its critical commercial airplane, namely the 737 MAX. Management started the year expecting 400-450 deliveries of the 737 MAX, only to cut guidance through the year to 375-400. The main issue holding deliveries back was a manufacturing quality issue around fuselages supplied by Spirit AeroSystems.
The medium-term plan, and the one intrinsic to its FCF aims, is to hit a delivery rate of 50 a month (or 600 a year) in 2025/2026 time frame. To get there, Boeing aims to hit a delivery rate of 38 a month by the end of 2023 and ramp deliveries through 2024.
Third, at the Investor Day presentation in November 2022, management outlined that it would pass key milestones on fixed-price defense programs in 2024, resulting in derisking its problematic defense programs.
Image source: Getty Images.
While that's something to look forward to, it's been a disappointing year for Boeing's defense business overall, and it continues to struggle with supply chain and labor issues, causing cost overruns and charges. Indeed, West appeared to walk back the expected contribution from the defense business to the $10 billion FCF target on the last earnings call: "We have a lot of confidence that they will be contributing to that $10 billion, maybe not quite as much, but they're going to be positive."
Is Boeing stock a buy for 2024?
All told, Boeing remains an attractive stock for investors, but I think it makes sense to be a little patient and wait for management to give guidance for 2024 so investors can see what kind of bridge there is to get to the 2025/206 target. Ramping 737 MAX deliveries, supply chain issues, and cost overruns on its defense programs continue to pressure the company. The setbacks this year make it harder for Boeing to hit that target, and any bad news on that front will surely hurt the stock in the near term.
