It is always interesting when a share is at a high level Boeing (NYSE:BA) falls because the market often overreacts, creating a good buying opportunity. However, there is no guarantee that what goes down must come back up. Here’s why the stock fell and what it means for investors.
Boeing management speaks
CFO Brian West’s presentation at the Wolfe Research Global Transportation & Industrials Conference was not what investors wanted to hear. I’ll start with the headlines and then the context around them.
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This will be a year of cash burn for Boeing.
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Management expects 737 deliveries to be “broadly in line with the first quarter,” with delays for aircraft to China and Boeing continuing to work to “consolidate our new manufacturing procedures.”
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Boeing Defense, Space & Security (BDS) will be negative in the second quarter.
Boeing’s cash burn
While West did not provide figures on expected cash outflows in 2024, he did say he expected this year to be “a use versus cash flow generation event,” with large cash outflows in the first half leading to cash generation in the first half of 2024. second half as deliveries improve.
This is not very pleasant for two reasons. First, during Boeing’s first-quarter earnings call a month ago, West told investors that free cash flow (FCF) “is still expected to be in the low single-digit billions for a generation.”
Second, the cash outflow casts doubt on Boeing’s long-standing target of $10 billion in free cash flow by 2025/2026 – a target that West and CEO Dave Calhoun continue to maintain.
It’s not just about numbers; it’s about the things Boeing needs to do to get there, and there are still plenty of hurdles to overcome.
Delivery delays
One of the hurdles is ramping up production of aircraft, especially the 737. The $10 billion in 2025/2026 means reaching a rate of 50 per month, equivalent to an annual rate of 600. But here’s the thing: Boeing’s 737 deliveries of 396 in 2023 were behind initial expectations of 400 to 450.
Furthermore, Boeing only delivered 67 of the 737s in the first quarter, so West’s claim that the second quarter would be in line with the first quarter implies about 135 deliveries in the first half.
Boeing has not delivered planes to China lately as the Chinese Civil Aviation Administration requests “additional validation” for a lithium battery used in a cockpit voice recorder. In addition, Boeing is working to improve its production procedures.
Whichever way you look at it, achieving West’s stated target of reaching a figure of 38 per month in the second half of the year is questionable, as is the overarching target of reaching 50 per month by 2025/2026.
Boeing Defense, space and security
After BDS returned to positive margins in the first quarter (2.2%, bringing in $151 million in segment revenue), the last thing investors wanted to hear was that margins would be negative in the second quarter. The penultimate thing they would like to hear is about greater pressure on the costs of fixed-price BDS development programs. Both things happened.
The fixed price defense programs, created during times of lower inflation, have been a thorn in the side of BDS margins for some time, and these types of cost pressures have also affected BDS margins. RTX And Lockheed Martin.
What it means for investors
Management’s scaling back of 2024 expectations is not a good sign and puts further pressure on the $10 billion FCF target in 2025/2026. That goal may have to be abandoned before Calhoun leaves as CEO at the end of 2024.
In addition, there are high-profile labor negotiations looming, as well as a potential need to invest in a hull supplier Spirit AeroSystems (not least because Spirit needs to increase production of 737 fuselages from 31 per month to meet Boeing’s target of a 737 production rate of 38 per month by 2024). Boeing is in ongoing discussions about acquiring Spirit.
Moreover, the Spirit acquisition and cash outflow in 2024 will further put pressure on Boeing’s debt position. West said “nothing is off the table” regarding potential funding. All in all, Boeing’s problems are mounting and there are better ways to invest in the aerospace sector.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin and RTX. The Motley Fool has a disclosure policy.
Boeing’s stock price just dropped. Is now the time to invest? was originally published by The Motley Fool
