Source: PaxForex Premium Analytics Portal, Fundamental Insight
Investors might be wondering not just about Boeing's position in the next three years, but even in the next three months. The company has already experienced a tumultuous year, casting doubt on its midterm projections. Here’s a look at how to approach investing in Boeing over the coming years.
When CEO David Calhoun presented Boeing's midterm goal of achieving $10 billion in free cash flow (FCF) by the 2025/2026 timeframe, the expectation was likely set for 2025. However, concerns have since arisen about the feasibility of reaching this target by 2026.
Interestingly, Wall Street analysts are more conservative, forecasting a significantly lower FCF of $8.2 billion for 2026. Despite this, Boeing's management remains committed to their original target.
CFO Brian West, during an earnings call in April, stated: "We continue to expect that this goal will take us longer than we originally planned, and now anticipate achieving it later in the '25, '26 window, primarily due to the 737 and 787 production delivery ramps of 50 per month and 10 per month, respectively."
As CEO Calhoun prepares to step down at the end of the year, he is poised to leave the office adhering to the $10 billion FCF target for the 2025/2026 period.
The FCF target is crucial for Boeing as it plans to use its FCF to meet debt maturities in the coming years and to accelerate debt repayments with any surplus. This is especially important in an industry that demands substantial, long-term investments for developing new aircraft.
Boeing's debt has surged due to recent challenges, and despite CEO David Calhoun's statement that a new Boeing airplane won't be available until 2035, the company still requires cash for advance development. As CFO Brian West noted, achieving the FCF target depends on ramping up production to 50 Boeing 737s per month. For context, Boeing delivered only 67 Boeing 737s in the first quarter due to quality-control issues and expects similar numbers in the second quarter.
However, on a positive note, management aims to reach a production rate of 38 Boeing 737s per month in the latter half of this year. Despite this, Wall Street's estimates suggest Boeing might not meet its target, and several factors could impact the company's cash flow.
Delays in deliveries can lead to compensation claims from airlines, and Boeing might need to offer discounts on new orders to account for delayed deliveries. Additionally, Boeing is currently negotiating a new contract with the International Association of Machinists and Aerospace Workers (IAM), as the current contract expires in mid-September. The company's defense sector is expected to report another loss in the second quarter, with West indicating that its recovery is behind schedule and may not contribute as much as planned to medium-term goals.
Furthermore, Boeing's intended acquisition of 737 fuselage maker Spirit AeroSystems will require investment, as Spirit has faced financial challenges and needs to scale up production to meet Boeing's targets. Increasing airplane production is already challenging, and the added pressure to deliver complicates the situation. Therefore, skepticism about the $10 billion FCF target for 2025/2026 is warranted, and even Wall Street's estimate of $8.2 billion may be overly optimistic.
Boeing is likely to be in a stronger position in three years, but uncertainty around its financial health and ability to invest in new airplane development persists. While the company is keen to ramp up production, the costs associated with new contracts, quality improvements, and the investment in Spirit AeroSystems may result in lower profit margins and cash flow than anticipated by the market.
As long as the price is above 170.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 180.43
- Take Profit 1: 190.00
- Take Profit 2: 200.00
Alternative scenario:
If the level of 170.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 170.00
- Take Profit 1: 160.00
- Take Profit 2: 150.00
