It's always interesting when a high-level stock like Boeing (BA +4.11%) slumps because the market often overreacts, creating a good buying opportunity. However, there's no guarantee that what goes down must come up again. Here's a look at why the stock fell and what it means for investors.
Boeing's management speaks
CFO Brian West's presentation at the Wolfe Research Global Transportation & Industrials Conference wasn't what investors wanted to hear. I'll start with the headlines and then the context around them.
- This will be a year of cash burn for Boeing.
- Management expects its 737 deliveries to be "more or less in line with the first quarter," with delays to planes to China and Boeing continuing to work through "solidifying our new production procedures."
- Boeing Defense, Space & Security (BDS) will be negative in the second quarter.
NYSE: BA
Key Data Points
Boeing's cash burn
While West didn't put a figure on the expected cash outflow in 2024, he did say he expected this year to be "a use versus generation of cash flow," with a large cash outflow in the first half leading to cash generation in the second half as deliveries improve.
This isn't very pleasant for two reasons. First, during Boeing's first-quarter earnings call a month ago, West told investors free cash flow (FCF) "is still expected to be a generation in the low-single-digit billions."
Second, the cash outflow calls into question Boeing's long-standing target of $10 billion in FCF in the 2025/2026 time frame -- one that West and CEO Dave Calhoun continue to maintain.
It's not just about numbers per se; it's about the things Boeing needs to do to get there, and there are plenty of hurdles to overcome.
Image source: Getty Images.
Delivery delays
One of the hurdles is ramping up airplane production, particularly the 737. The $10 billion in 2025/2026 implies hitting a rate of 50 a month, equivalent to a yearly rate of 600. But here's the thing: Boeing's 737 deliveries of 396 in 2023 were behind its initial guidance of 400 to 450.
In addition, Boeing only delivered 67 of the 737s in the first quarter, so West's assertion that the second quarter would be in line with the first quarter implies about 135 deliveries in the first half.
Boeing hasn't been delivering planes to China recently as the Civil Aviation Administration of China is requesting "additional validation" on a lithium battery used in a cockpit voice recorder. In addition, Boeing is working on improving its production procedures.
Whichever way you look at it, hitting West's stated aim of reaching a rate of 38 a month in the back half of the year is open to question, as is the overarching aim of hitting 50 a month in 2025/2026.
Boeing Defense, Space & Security
After BDS returned to positive margins in the first quarter (2.2%, delivering $151 million in segment income), the last thing investors wanted to hear was that second-quarter margins would be negative. The second-to-last thing they would like to hear is about more cost pressure on BDS fixed-price development programs. Both of these things happened.
The fixed-price defense programs, secured in less inflationary times, have been a thorn in the side of BDS margins for a while, and this kind of cost pressure has also hit RTX and Lockheed Martin.
What it means to investors
Management walking back 2024 guidance is not a good sign and puts further pressure on its target of $10 billion FCF in 2025/2026. That goal may need to be abandoned before Calhoun departs as CEO at the end of 2024.
Moreover, there is a high-profile labor negotiation coming up, as well as a potential need to invest in fuselage supplier Spirit AeroSystems (not least as Spirit needs to ramp up 737 fuselage production from 31 a month to meet Boeing's 2024 aim of hitting a rate of 38 a month on the 737). Boeing is in ongoing discussions about acquiring Spirit.
In addition, the acquisition of Spirit and the cash outflow in 2024 will further pressure Boeing's debt position. West said, "Nothing is off the table" regarding potential funding. All told, Boeing's problems are worsening, and there are better ways to invest in the aerospace sector.
