Source: PaxForex Premium Analytics Portal, Fundamental Insight
The outlook for aerospace and defense giant Boeing in 2024 is riddled with uncertainties, prompting investors to contemplate their positions. With the stock down slightly over 23% in the current year, the question arises: Is it an opportune moment to accumulate shares or a time to steer clear?
Let's get straight to the point – the answer is "no," and this perspective revolves around the medium-term uncertainties looming over the company's future. Recent events have introduced substantial risks to the outlook presented by management at the November 2022 investor conference, possibly necessitating a revision, especially concerning the higher end of the expectations.
The significance of management's financial objectives cannot be overstated, as investors invariably factor them into their anticipations, and Boeing appears alluring when priced against these objectives. To recap, the critical components of the objectives outlined for 2025 to 2026 include:
Free Cash Flow (FCF) of $10 billion:
- This forecast assumes an operating cash flow of $9 billion from Boeing commercial airplanes (BCA), $3 billion from Boeing Global Services (BGS), and $2 billion from Boeing Defense, Space & Security (BDS).
- Key assumptions involve a 737 production rate of 50 per month by 2025/2026, a 787 production rate of 10 per month, and a 777/777X production rate of four per month.
The flexibility within the 2025 to 2026 timeframe allows Boeing some maneuvering room. Achieving the FCF objective at the end of 2025 is more attainable than at the beginning. Currently, analysts on Wall Street project $9.3 billion in FCF for 2025.
In terms of valuations, Boeing's current market capitalization is $121 billion. If the company attains $9.3 billion in FCF in 2025, it would be valued at 13 times FCF. Even in a worst-case scenario, hitting $10 billion in 2026 would result in a valuation of 12.1 times FCF. These valuations are enticing for a company producing 50 737 airplanes a month if it successfully meets its objectives.
However, a series of challenges presents a formidable obstacle. Heading into 2023, investors anticipated a year of seamless execution from BCA, with the business targeting 400 to 450 deliveries for the 737. Additionally, investors were optimistic that BDS would avoid additional costly charges and cost overruns while addressing problematic fixed-price development programs.
Unfortunately, none of these anticipations materialized in 2023, and the underlying reasons also cast doubt on its medium-term objectives.
Commencing with BDS, Boeing is not the only participant grappling with challenges and margin pressures in its defense sector. Pervasive supply chain disruptions, escalating costs of raw materials and labor, coupled with availability constraints, have hindered defense companies' capacity to uphold margins. This predicament is particularly troublesome for fixed-price programs established during less inflationary periods.
Boeing faced significant financial setbacks in the third quarter, including a $482 million charge related to VC-25B (Air Force One), a $315 million loss associated with a legacy satellite contract, and a $136 million reduction in costs on the MQ-25 aerial refueling drone— all of which fell short of expectations. As a consequence, BDS reported an operating margin of negative 16.9% for the quarter. CFO Brian West tempered expectations for BDS' contribution to the 2025/2026 objectives, stating, "We have a lot of confidence that they will be contributing to that $10 billion, maybe not quite as much, but they're going to be positive."
BCA faces challenges of a more notable nature. Although it met its target for 787 deliveries in 2023 (73 vs. a target of 70 to 80), it fell short of its 737 delivery goal of 400 to 450 by only delivering 396. Manufacturing quality issues on fuselages supplied by Spirit AeroSystems compounded Boeing's delivery rate falling behind expectations. Despite actions taken to address uncertainties, a recent fuselage blowout on an Alaska Airlines flight has set back the company, and additional inspections, particularly by Spirit AeroSystems, the Federal Aviation Administration, and Chinese airlines (which may lead to delayed 737 deliveries), pose threats to its delivery outlook.
The company is scheduled to release its fourth-quarter earnings on Jan. 31. Management has already informed investors to expect Free Cash Flow (FCF) toward the lower end of the $3 billion to $5 billion forecast for 2023. Furthermore, ongoing BDS issues and revised medium-term expectations add uncertainty. Considering the latest challenge to 737 delivery rates, it wouldn't be surprising to see Boeing potentially adjusting its $10 billion expectations, possibly extending them to the later part of the 2025/2026 period or even revising them downward. This is a factor to weigh carefully before considering an investment in the stock.
As long as the price is above 200.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 211.25
- Take Profit 1: 220.00
- Take Profit 2: 233.00
Alternative scenario:
If the level of 200.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 200.00
- Take Profit 1: 190.00
- Take Profit 2: 178.00
