Source: PaxForex Premium Analytics Portal, Fundamental Insight
Last week, Boeing announced a resumption of revenue growth in Q3 and free cash flow generation of $2.9 billion. These accomplishments were important indicators in the aerospace giant's long effort to emerge from the recession.
Nevertheless, Boeing's debt load was unchanged in Q3 at $57.2 billion: up from $11.9 billion just four years ago. With the global economy weakening, supply chain disruptions, and previous mistakes still costing Boeing billions of dollars, the company's weak balance sheet makes Boeing's stock extremely unattractive.
In some respects, Boeing made progress in its turnaround last quarter. In particular, the company resumed deliveries of the 787 Dreamliner in August after a long hiatus caused by quality control problems. Boeing delivered nine 787s during the quarter. This contributed to the company's return to revenue growth and positive free cash flow. (It was also helped by a $1.5 billion tax refund.)
However, Boeing continues to struggle in many areas of its business. For example, the company's defense division recorded a $2.8 billion operating loss last quarter due to a variety of costs associated with various fixed-price military and space projects. This led the company to report a shocking basic loss of $6.18 per share in Q3.
In addition, management warned that supply chain problems will continue to have a strong impact on commercial aircraft production next year. Geopolitical tensions between the U.S. and China have all but shut down Boeing's huge Chinese market. Finally, the smallest and largest models of Boeing's troubled 737 MAX program are unlikely to make the current design certification by December 31. Boeing may be able to lobby Congress to extend that deadline, but otherwise, it will likely be forced to cancel both the 737-7 and 737-10.
In short, a combination of self-dealing, bad luck, and macroeconomic factors will partially offset the benefits of eliminating the 737 MAX and 787 overstocks in 2023 and 2024. This will result in free cash flow well below historical levels.
Boeing's disappointing outlook makes its weak balance sheet especially sad. Boeing has $250 million in debt coming due in recent days, with another $9.5 billion due in 2023 and Q1 of 2024.
Although Boeing should continue to generate cash over the next year and a half, free cash flow will probably not be able to fully cover these upcoming payments because of the company's slow recovery. This will force Boeing to use $14.3 billion in cash and investments to pay down its debt.
Even after scheduled debt repayments, Boeing will still have more than $47 billion left over. The company will likely have to devote all of its free cash flow to debt reduction until at least 2026 to fix its balance sheet. As a result, Boeing shareholders should not expect the company to resume paying dividends or significant stock buybacks anytime soon.
By the time Boeing gets its debt back to an acceptable level, the company will have to begin the transition from its most important product, the 737 MAX, to the next-generation narrow-body aircraft. Boeing has no choice but to develop an entirely new narrow-body aircraft, given the technical limitations of the 737 MAX compared to the rival Airbus A320neo family.
However, this could prove extremely costly. First, Boeing would have to increase R&D spending to develop an entirely new family of aircraft. Then the company will have to spend money to build a production system while offering big discounts on the outgoing 737 MAX to sell the remaining supply seats. And when the new plane is ready, it could take years to reduce production costs and make the program profitable.
Boeing hopes to use advanced design and manufacturing techniques to significantly reduce the cost of transitioning to next-generation aircraft. If successful, Boeing stock could eventually pay off for shareholders willing to hold it for more than a decade.
However, there is no guarantee that this ambitious plan will work-especially in light of Boeing's frequent mistakes in recent years. With $57 billion in debt and numerous external factors to contend with, anything short of perfection could result in a further decline in Boeing stock returns.
As long as the price is above 131.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 142.30
- Take Profit 1: 150.00
- Take Profit 2: 170.00
Alternative scenario:
If the level of 131.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 131.00
- Take Profit 1: 121.00
- Take Profit 2: 110.00
