Source: PaxForex Premium Analytics Portal, Fundamental Insight
The perspective on Boeing's medium-term outlook holds significance for investors, as the interest in the stock is not based on its current state but on its potential trajectory. Management has articulated its 2025/2026 targets during the investor day presentation in November 2022, outlining a plan that includes a multiyear uptick in airplane production, particularly the 737 narrowbody, and a substantial improvement in Boeing Defense, Space, and Security (BDS) profit margins, ultimately leading to $12 billion in segment operating cash flow. Post a deduction of $2 billion in capital spending, Boeing anticipates $10 billion in free cash flow (FCF) in the 2025/2026 timeframe.
Several noteworthy aspects deserve attention about these objectives and the current state of affairs:
- Boeing is lagging behind in achieving its milestones.
- The timing of achieving these goals is crucial, not just the probability of meeting them.
- The set target holds considerable significance for Boeing's long-term prospects.
Understanding these dynamics is crucial for investors as they assess the potential future trajectory of Boeing and how it aligns with their investment propositions.
Regrettably, Boeing's journey toward its set target is encountering challenges. Despite laying out expectations for 400-450 Boeing 737 deliveries in 2023 to achieve a production rate of 50 per month in 2025/2026, Boeing fell short by delivering only 396 planes in 2023. The hiccup in reaching these numbers is not primarily due to supply chain issues or component unavailability; instead, manufacturing quality problems persist, exemplified by the recent high-profile panel blowout on an Alaska Airlines flight.
In response to these setbacks, management opted to postpone its 2024 guidance during a recent earnings call, signaling potential hurdles in bridging the gap to Boeing's medium-term goals - a concern for investors seeking clarity.
Another less-discussed challenge is Boeing Defense, Space, and Security (BDS) consistently reporting losses. While Boeing is not alone in grappling with margin pressure in its defense business, industry peers like RTX and Lockheed Martin are also experiencing similar challenges. The spotlight is on the fixed-price development programs for defense contractors, won during less inflationary periods, which are currently under notable pressure.
In October, Boeing CFO Brian West hinted at BDS contributing to reaching the $10 billion Free Cash Flow (FCF) target, albeit "maybe not quite as much" as initially anticipated. Despite the setbacks, West expressed confidence in the 2025/2026 goals during the recent earnings call, acknowledging potential delays within that timeframe. He emphasized a cautious approach, stating, "we won't rush the system," indicating Boeing's commitment to addressing challenges diligently rather than hurriedly.
While the extension of the timeline for Boeing's $10 billion target may appear inconsequential, it carries significant implications for investors' perception of the stock. Simplistically, a mature industrial company is typically valued at around 20 times its Free Cash Flow (FCF). Applying a 20 times FCF multiple to Boeing and assuming the $10 billion target is achieved would imply a target market capitalization of $200 billion, or $327 per share based on the current price.
This figure represents a 56% premium to the current price. Assuming the $10 billion target is reached at the start of 2025, it implies a stock return of about 56%. If achieved by the end of 2025, this suggests a 25% annual return. Finally, assuming the target is hit by the end of 2026, it implies a 16% annual return.
As illustrated in this example, the timing significantly influences the investment proposition. Wall Street analysts anticipate Boeing reaching the $10 billion target around 2026, with consensus estimates projecting $8.8 billion in FCF in 2025 and $10.8 billion in 2026.
The Boeing 737, in service since 1967, requires substantial time and financial resources for a complete redesign. CEO David Calhoun has indicated that a new Boeing plane won't be in place before 2035. However, Boeing's current debt of $52.3 billion underscores the urgency to achieve the $10 billion in FCF sooner rather than later, especially for debt repayment and future investments.
While the company is expected to be in a more favorable position in the coming years, the timing nuances of its FCF generation significantly impact the investment proposition and its long-term future. Despite the stock's appeal, there are other aerospace stocks with better operational execution at present. Boeing needs a consistent run of strong quarters to dispel doubts and reinforce investor confidence.
As long as the price is below 193.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 179.37
- Take Profit 1: 170.00
- Take Profit 2: 160.00
Alternative scenario:
If the level of 193.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 193.00
- Take Profit 1: 200.00
- Take Profit 2: 207.00
