It has been a chaotic time to own shares of Boeing (BA 3.46%) stock. Since the tragic and deadly crashes of its aircraft in 2018, the company has been consistently in turmoil. Some events -- such as the COVID-19 pandemic shutdowns -- were out of its control, but most of this has been self-inflicted. Airline customers and flyers are worried about the quality of its aircraft, and rightfully so, as we saw earlier this year when a door flew off an Alaska Airlines aircraft 10,000 feet in the sky.
It's now five years after the deadly 737 Max crashes and Boeing's quality control still can't seem to get on track. This is likely why we saw the company announce this week that the chief executive officer (CEO), chair of the board, and head of commercial airplanes will all be leaving the company.
Bringing in new leadership is huge news for Boeing. Here's what it could mean for the company and its beaten-down stock.
Major executive shakeup
In a press release, Boeing announced three changes to its leadership team on March 25th. The chair of the board will be stepping down and is being replaced by Steve Mollenkopf, former CEO of Qualcomm and an engineer. In most situations, it wouldn't matter what educational background the board of directors has -- but in the case of Boeing I think it is important for the company to have as many engineers as possible at the helm to fix its quality control issues.
Second, Boeing announced it was replacing the head of its commercial airline division -- the segment where all these problems have occurred -- with Stephanie Pope, the current chief operating officer of Boeing (COO). Pope is a Boeing veteran who has worked in virtually every division at the company. Time will tell if she is the right person for the job, but it was clear that the current division leaders were not up to the task.
Speaking of which, CEO Dave Calhoun announced he was retiring at the end of 2024 as well. Hiring a CEO is different than most other roles, as it is the job of the board of directors. Boeing specifically will be looking for someone who can fix its quality control issues. One candidate could be the new CEO of Spirit Aeorosystems Patrick Shannahan. Shannahan was brought on to the troubled Boeing supplier in late 2023 and has a long history of working at Boeing. He also has worked in the Department of Defense (an important customer of Boeing) and has major ties to the state of Washington, where Boeing's manufacturing is mostly located.
Whoever the next CEO is, investors should have a watchful eye on the decision. Many analysts believe Calhoun was the wrong person for the job, as he came from a finance background and was not meant to lead an engineering and manufacturing behemoth such as Boeing.
Can production (and cash flow) eventually rebound?
From a business perspective, Boeing needs to get back to consistently generating cash flow. To do so, it will need to up the production rate for its commercial aircraft business. Before the 737 Max crashes, Boeing was generating more than $10 billion in free cash flow a year. Ever since, its production levels have dropped and its cash flow has suffered. It recovered a bit last year but looks poised to dip in 2024, with its production levels down once again. Boeing management already pulled its financial guidance after this latest Alaska Airlines incident.
Boeing has minimal competitive risks. As an American national champion with close to zero domestic competitors, customers will buy its aircraft if it can produce them in a timely manner with high-quality standards. At the end of the day, there are two things that matter for Boeing: high production levels and high-quality standards. If they can figure out both, the free cash flow should take care of itself.
BA Free Cash Flow data by YCharts
Is the stock cheap? Well, it depends
Boeing's stock has unsurprisingly remained in the gutter for years. Today it is off 57% from all-time highs for a market cap of approximately $110 billion. It has a large debt pile of $36 billion that it had to take on during the COVID-19 pandemic. This is a manageable debt position as long as the company starts generating consistent cash flow.
Again, it all comes back to increasing production. If Boeing can increase its annual production of commercial aircraft, it will likely start generating more than $10 billion in free cash flow each year, which can grow along with the global aviation market. This would give it a reasonably cheap valuation compared to its market cap of $110 billion and plenty of capital to pay back its $36 billion in net debt. It wouldn't be shocking to see a healthy Boeing generating $15 billion-$20 billion in annual profits in 2030.
If you believe Boeing can solve its production issues, the stock looks cheap here. But if it can't, the stock will likely do poorly over the next decade. This is why the new CEO and leadership team are important news for investors to follow.
