Boeing (BA 1.09%) stock has significant potential, backed by a $682 billion backlog, including more than $560 billion at Boeing Commercial Airplanes. The backlog supports future growth, and with the company set to ramp up deliveries of its key narrow-body 737 MAX aircraft this year, its turnaround is underway. That said, the stock has notably underperformed the S&P 500 index since its earnings report on Jan. 27.
Why Boeing's stock declined
Potential is one thing, and realizing it is another. There's no doubt that if Boeing executes well on its backlog, its stock could move meaningfully higher. Let's put it this way: Before the high-profile 737 MAX crashes (which led to its grounding) occurred in late 2018 and the spring of 2019, Boeing was a business generating $13.7 billion in free cash flow (FCF).
Image source: Getty Images.
With a current market cap of $165.7 billion, that kind of FCF would put Boeing on 12.1 times FCF. But the question is, when will Boeing start generating anything close to that figure? To do so, it will have to start demonstrating to investors that it can report blemish-free quarters, without any major losses and charges on fixed price development programs at Boeing Defense, Space & Security (BDS), and any hiccups at BCA.
Unfortunately, it's easier said than done, and the recent sell-off highlights the issues.
Boeing's cash flow struggles
Zeroing in on FCF illuminates matters. Going back to the earnings call in late January, CFO Jesus Malave said he expected Boeing to generate $1 billion to $3 billion in FCF in 2026, He also said that hitting the previous FCF target of $10 billion was "very obtainable," and that FCF in 2026 was negatively impacted by factors which are "temporary in nature" and will "improve over time."
Stripping out these factors would result in FCF in the "high single digits" according to Malave, a figure well on its way to $10 billion and beyond.
NYSE: BA
Key Data Points
Temporary factors?
All of what Malave said is fine, but the problem is that these temporary factors appear to recur at Boeing. Digging into the details, they include:
- Certification delays on the 777X
- Customer compensation for prior delivery delays on the 737 MAX and 787 programs
- Runoff from charges on fixed-price development programs at BDS
- Capital expenditures are spiking due to "supporting growth in a stable production system."
Once again, Boeing is facing a year of FCF constraints due to a mix of largely internal execution factors and, in the case of BDS, possibly a structural issue related to the U.S. government negotiating more aggressively with defense companies.
Is Boeing stock a buy?
Malave may well be right, and if so, the stock is probably a bargain right now. Still, investors will want to see a few quarters of good execution, no certification issues, no delivery delays, no defense charges, and no manufacturing quality issues before buying in. Management probably deserves the benefit of the doubt, and Boeing is ramping 737 MAX deliveries in 2026, but there's still a way to go before investors can feel fully confident.
