No one is buying Boeing (BA 2.58%) stock for what the company is now. Instead, the case for buying the stock rests on what it could become in the next few years. In that context, CFO Brian West’s recent presentation at a Wolfe Research conference helped to restore investor confidence in Boeing’s mid-term growth plans. Here are the key takeaways from West’s presentations.
Boeing’s mid-term plans
As a reminder, Boeing’s key priority is to get to $10 billion in free cash flow (FCF) in the 2025 to 2026 timeframe. Doing so would enable Boeing to significantly reduce the debt it racked up due to a combination of the 737 MAX grounding and the travel restrictions imposed on the populace by governments. So, in a nutshell, FCF needs to go up, and debt needs to go down.
As such, investors should closely monitor the operational things Boeing has to do to get to its FCF target, including a successful production ramp on the 737 MAX and avoiding more costly charges and delays on some of its problematic fixed-price defense programs.
Fortunately, West’s recent presentation encouraged these issues. I have three takeaways:
- The current issues relating to 737 MAX fuselages supplied to Boeing aren’t resulting in material costs, and Boeing is already delivering reworked planes.
- The demand environment remains excellent, and it supports better price realization — something that will help generate earnings and cash flow.
- The supply chain is healing, and the assumptions management is making imply there could be more upside to come after the 2025/2026 FCF target is achieved.
The 737 MAX fuselages
Boeing is being forced to rework fuselages supplied by Spirit AeroSystems following a discovery that fittings had been installed without following the correct procedure. While delivery delays and cost overruns on the 737 MAX are the last things investors want to hear about, they must be put into context.
According to West, Boeing is already delivering reworked planes from its inventory. Meanwhile, “the cost of this rework was immaterial, and it was booked in the first quarter in our closing position,” he said. Moreover, he confirmed Boeing for the 400-450 target for 737 deliveries this year.
End demand, pricing, and margins
Given the multi-year backlogs at both Airbus and Boeing, the environment is “pretty good for price realization,” according to West. Of course, Boeing and Airbus have list prices for their aircraft, but the battle to “realize” those prices, or even something close to them, in the face of airlines seeking discounts is part and parcel of the industry.
The excellent news is that Boeing has won significant orders this year, confirming the robust demand environment. For example, Air India ordered 190 Boeing 737 MAX (with an option to order 50 more), 20 Boeing 787 Dreamliners (with an option to order 20 more), and 10 Boeing 777X. Ryanair placed an order for 150 Boeing 737 MAX and has an option for 150 more. Moreover, according to Bloomberg, Boeing is working on an order for 150 Boeing 737 MAX from Riyadh Air after securing an order for 78 Boeing 787 from Saudia and Riyadh in March.
The supply chain is healing, but it will take time
The final argument is a bit subtle, but bear with me. Boeing’s management is clear to investors that the supply chain will take time to normalize in its commercial and defense businesses. CEO Dave Calhoun believes the supply chain pressures will run through 2024. Meanwhile, West said that view was “always contemplated when we put out our view of the future.”
In other words, the target of $10 billion in FCF in 2025/2026 assumes supply chain pressures will run through 2024. If they ease in 2025 (in both its commercial and defense businesses), then there’s an opportunity for margin expansion as the cost comparisons become easier, and it becomes less problematic to ramp airplane production.
A stock to buy
As noted earlier, Boeing has already disappointed investors with production issues in commercial airplanes and its defense business. Still, the cost of the fuselage reworking isn’t significant, and Boeing remains on track for its medium-term target. That target will be more easily achievable if its end-market demand holds up and orders keep flowing in as they have done so in 2023 so far. Meanwhile, a normalization of the supply chain in 2025 holds out the prospect for ongoing growth in FCF after Boeing hits $10 billion.