Boeing's (BA 0.25%) CFO, Brian West, gave a compelling presentation during the Bank of America Global Industrials Conference on March 20, shedding light on the company's plans for 2024. However, before investing in Boeing's stock, it's vital to consider the current situation and its potential impact on the company's long-term growth. Therefore, it's crucial to understand the key takeaways from West's presentation and its significance for investors.
Boeing's operational changes
On Jan. 5, a panel on a Boeing plane blew out during an Alaska Airlines flight, which resulted in serious consequences. Apart from the FAA conducting audits into Boeing and fuselage supplier Spirit AeroSystems' (SPR 2.14%) production, the incident has led Boeing's management to reconsider its approach to operations. West's presentation highlighted four key points to consider.
First, West highlighted the need for a "step change improvement in how we think about traveled work." This refers to work that is delayed and/or finished in another location.
For example, West noted that Boeing eliminated "travel work" between Wichita and Renton from the start of March and "will only accept a fully conforming fuselage from Spirit AeroSystems." The latter, which used to be part of Boeing, supplies fuselages on the 737 MAX.
Second, he outlined that Boeing had consciously decided to slow down production on the 737 MAX to make changes and ensure quality control.
Third, he stated that Boeing would aim to better synchronize its suppliers, with some needing to catch up with the production schedule and others needing to slow down.
Fourth, he acknowledged that Boeing had gotten ahead of itself in outsourcing and that a potential deal to bring Spirit AeroSystems back in-house would be funded with a mix of cash and debt.
Two conclusions from the presentation
Investors should note a couple of things:
- All of the points discussed above tend to weaken and push out Boeing's cash-flow generation and add to its debt.
- Less robust cash-flow generation makes it harder for Boeing to eventually invest in developing a new airplane for the next generation of planes.
Image source: Getty Images.
Boeing's cash-flow generation
According to Boeing's Investor Day presentation in November 2022, Boeing aims to generate $10 billion in free cash flow (FCF) between 2025 and 2026. To achieve this target, Boeing plans to increase the production rate of the 737 to 50 per month and improve the profit margins of the Boeing Defense, Space & Security (BDS) sector from negative 7.1% in 2023 to high single-digits.
With West guiding toward low-single-digit billions in FCF in 2024 and the production rate on the 737 currently below 38 a month, Boeing is clearly struggling to meet the $10 billion in FCF target in 2025. West acknowledged that hitting the figure would take longer than planned but would be within the 2025-2026 window.
That's fair enough. However, the operational changes discussed above will pressure cash flow and debt. Buying Spirit will increase debt, and given its recent history of cash outflows, it could lead to FCF challenges at Boeing.
SPR Free Cash Flow data by YCharts
Furthermore, discontinuing "traveled work" and reducing the pace of 737 production also impacts cash flow. And improving the coordination among suppliers means that Boeing may face some working capital constraints as it builds inventory from some suppliers while waiting for others to catch up. This all points to a worsening cash flow and debt profile.
Developing new planes
Cash matters a huge amount because it takes many years and a lot of money to develop a new plane. In fact, Boeing CEO Dave Calhoun has said it won't have a new plane in place before 2035. Indeed, West repeated the mantra that Boeing was looking for a 20% to 30% improvement in airplane efficiency coming from "engine technology and aerodynamic investment" before Boeing intends to have a new airplane in place.
Unfortunately, Boeing is not guaranteed to be at the forefront of this development. Purely by way of example, China's Comac C919 airplane uses LEAP engines made by a GE joint venture, CFM International, and Brazil's Embraer E2-195 airplane uses geared turbofan engines from RTX's Pratt & Whitney.
They can both win market share in the growth markets of international aviation while taking advantage of new engine technology.
A stock to buy?
The upside potential for Boeing stock is obvious: $10 billion in FCF represents 8.7% of its current market cap and has a multiyear backlog. But the downside risk is growing. Any downturn in the aviation market could leave the company with a worsening debt profile and challenge its ability to invest in new planes over the next decade. As such, buying into its suppliers rather than Boeing stock right now makes more sense.
