Beleaguered aerospace and defense giant Boeing (BA +2.06%) faces a lot of uncertainty in 2024, which might cause investors to walk away from the stock. On the other hand, its stock is down slightly more than 23% in 2024. Is it time to load up on shares or avoid it altogether?
Boeing's medium-term objectives
This won't be a suspenseful movie, as I will cut to the chase in the opening credits. The answer is "no," and that view concerns the risk around the company's medium-term outlook. I think recent events have created a material risk around the outlook management gave at the November 2022 investor conference, and the company might be forced to, at the least, walk back the higher end of expectations.
NYSE: BA
Key Data Points
Management's financial objectives matter because investors inevitably price them into their expectations, and doing so with Boeing makes the stock look attractive. As a reminder, here are the critical components of the objectives previously laid out for 2025 to 2026:
- Free cash flow (FCF) of $10 billion
- Included in this forecast is the assumption for operating cash flow of $9 billion from Boeing commercial airplanes (BCA), $3 billion from Boeing Global Services (BGS), and $2 billion from Boeing Defense, Space & Security (BDS)
- Key assumptions include a 737 production rate of 50 a month by 2025/2026, a 787 production rate of 10 a month, and a 777/777X production rate of four a month.
Note that the 2025 to 2026 time frame gives Boeing some leeway. For example, hitting the FCF objective at the end of 2025 is much easier than hitting it at the start of 2025. For reference, Wall Street analysts currently have $9.3 billion in FCF penciled in for 2025.
For a sense of what these figures mean for valuations, Boeing's current market cap is $121 billion, so $9.3 billion in 2025 would put it at 13 times FCF in 2025, and hitting (in a worst-case scenario) $10 billion in 2026 would put it at 12.1 times FCF. These are excellent valuations for a company that will be producing 50 737 airplanes a month if the objective is being met.
Image source: Getty Images.
Boeing's 2023 aims
However, there's a problem. Or instead, a series of problems. Going into 2023, investors were hoping for a year of quiet execution from BCA, with the business hitting its target on the 737 of 400 to 450 deliveries. In addition, investors hoped BDS would avoid more costly charges and cost overruns as it works through problematic fixed-price development programs.
Unfortunately, none of these things happened in 2023, and the reasons why also threaten its medium-term objectives.
What's going wrong with Boeing
Starting with BDS, Boeing is not alone in having issues and margin pressures in its defense business. Ongoing supply chain issues and soaring raw material and labor costs/availability have challenged defense companies' ability to deliver on margin. It's even more problematic for fixed-price programs signed in less inflationary times.
The third-quarter BDS earnings are illustrative: a $482 million charge on VC-25B (Air Force One), a $315 million loss tied to a legacy satellite contract, and a $136 million less than expected reduction in costs on the MQ-25 aerial refueling drone.
As a result, BDS' operating margin was negative 16.9% in the quarter. CFO Brian West walked back expectations for BDS' contribution to the 2025/2026 objectives on the earnings call, saying, "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."
Boeing commercial airplanes
The issues at BCA are much higher-profile. While Boeing did hit its target for 787 deliveries in 2023 (73 vs. a target of 70 to 80), it missed its 737 delivery target of 400 to 450 by only delivering 396.
Beset with manufacturing quality issues on fuselages supplied by Spirit AeroSystems, Boeing's delivery rate fell short of expectations. While Boeing has taken action to remove uncertainty around the issue, the recent blowout on a fuselage on an Alaska Airlines flight has set the company back again, and further inspections, not least from Spirit AeroSystems, the Federal Aviation Administration, and Chinese airlines (which may delay 737 deliveries) threaten its delivery outlook.
Boeing's outlook
The company is set to deliver its fourth-quarter earnings on Jan. 31. Management has already told investors to expect an FCF toward the low end of the $3 billion to $5 billion forecast for 2023. In addition, the BDS issues are ongoing, and management has already walked back medium-term expectations. Throw in the latest challenge to 737 delivery rates, and it wouldn't be surprising to see Boeing, at least, push out its $10 billion expectations to the late end of the 2025/2026 period, if not to lower it overall. It's something to consider before buying into the stock.
