The recent results and share price movement in Boeing's (BA 0.25%) stock help encapsulate its investment case. Despite myriad difficulties, including missing delivery targets on the 737 and continuing to lose money in its defense business, the stock is only down 2.5% over the last year. Also, it is up 41% since management outlined its medium-term plans on its investor day in November.
So, what should investors think about the stock?
Boeing's long-term aims
Returning to the targets given in 2022, management said it aimed for $10 billion in free cash flow (FCF) in the 2025/2026 time frame. To get there, the plan is to get all three segments generating significant operating cash flows by then, with Boeing commercial airplanes (BCA) generating $9 billion; Boeing defense, space & security (BDS) $3 billion; and Boeing global services (BGS) $2 billion.
At this point, it's worth noting Boeing's market cap is only $128 billion, so $10 billion in FCF would put it on 12.8 times FCF in 2025 or, at the latest, 2026, according to the plan. Those are attractive valuations, and it's understandable if investors see Boeing as a great value play. After all, it has a multiyear backlog in place, and its only major competitor, Airbus, also has issues ramping production to meet demand.
Image source: Getty Images.
As part of the bridge to get there, management had forecast $3 billion to $5 billion in FCF in 2023. In addition, the plan involves hitting a production rate on the 737 of 50 a month, and getting BDS back to high-single-digit profit margins while working through problematic fixed-price development programs and, hopefully, avoiding costly charges on them.
Unfortunately, Boeing's scorecard on the way to achieving these aims is not good, and the fourth-quarter earnings help typify its issues.
Boeing's fourth-quarter earnings
This infographic shows many of the issues at stake. As you can see, Boeing is growing revenue at a double-digit rate. Still, its margin remains weak: Just $283 million in operating profit on $22 billion worth of sales means an operating profit margin of just 1.3%.
In addition, Boeing hasn't avoided multibillion-dollar charges on its defense business, and BDS's operating margin was -1.5% in the quarter and -7.1% for the year.
BCA delivered 396 Boeing 737 planes in 2023, well below its target of 400-450, and its profit margin was just 0.4% in the quarter. Given these levels of profitability, it's no surprise that Boeing's FCF of $3.1 billion for the full year just snuck into the guidance range of $3 billion to $5 billion I mentioned earlier.
In light of the fourth-quarter and full-year earnings, Boeing CEO Dave Calhoun fell short of changing the 2025/2026 targets and instead elected to do what some thought he might do earlier -- in other words, push out expectations for the targets to be hit: "We're still confident in the goals we laid out for '25, '26, although it may take longer in that window than initially anticipated, and we won't rush the system.
Is Boeing stock a buy?
Boeing's targets offer a large window of opportunity to hit, but the company is undeniably behind track. The latest quality control issue on the 737 raises questions over the company's processes, and management's failure to issue 2024 guidance on the recent earnings call is a sign of the uncertainty around its commercial airplane deliveries this year.
Meanwhile, Boeing is definitely not the only company struggling to generate margin expansion in the defense industry. For example, RTX missed its defense business guidance for the last two years and recently took down its medium-term defense business outlook, while Lockheed Martin continues struggling with margins.
These issues speak to an industry-wide problem of soaring costs as defense contractors execute fixed-price programs they overly competitively bid for.
It all suggests more challenges for Boeing, yet the stock remains a good value proposition. Cautious investors will wait until management issues some form of guidance for 2024, and there are plenty of other ways to invest in the sector. As such, it makes sense to wait and see what Calhoun has in mind for 2024 and how viable the "bridge" to 2025/2026 is before buying in.
