Can buying Boeing stock today be a lifetime guarantee?

The idea behind buying Boeing (NYSE:BA) inventory is easy. Despite the problems of recent years, the aviation giant remains an effective duopoly in the commercial aerospace aircraft market Airbus. It also has a backlog of $500 million, which amounts to more than seven years of projected revenue in 2024. The ingredients for a recovery are in place, and so is a new CEO, Kelly Ortberg, appointed in the summer to to lead a turnaround at the company. Is this enough to make Boeing an attractive stock for long-term investors?

The stock certainly has upside potential, and as previously discussed, it isn’t solely dependent on ramping up production of the 737 MAX and working through problematic fixed-price development programs in its defense business. These are crucial elements for a recovery and are also within Boeing’s reach.

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However, the new CEO could restore a lot of investor confidence in other ways, such as by resetting investor expectations to more realistic targets than $10 billion in free cash flow by 2025/2026, a goal set by Ortberg’s predecessor Dave Calhoun. Similarly, Ortberg says Boeing’s defense division needs to improve its estimate-at-completion (EAC) processes. If a company can’t get its internal EAC right, there’s a good chance it will disappoint investors with its external forecasts. Moreover, Ortberg is taking the opportunity to review the portfolio, and the opportunity to restructure the company could generate value for investors.

All things considered, it’s clear that much of what Boeing needs to do is achievable, and that management has multiple ways to add value for investors. There is always the cyclical risk of an economic slowdown and its impact on aircraft orders, but Boeing is essentially a self-help story.

The company has upside potential, but is it an investment that will last you a lifetime? Frankly, that seems unlikely, for two reasons:

• Boeing faces many obstacles on the road to recovery.

• A long-term investor should remember that the stock’s valuation reflects the need to invest in the next cycle of aircraft

The risks and headwinds are significant. Ongoing supply chain issues in the aerospace sector pose challenges for aircraft manufacturers and suppliers alike, and those headwinds will make it difficult and expensive to ramp up production. For example, think about that GE Aviation started the year expecting to deliver 20%-25% more LEAP engines (used to power the Boeing 737 MAX and Airbus A320neo family) in 2024 than in 2023. Fast forward to the third quarter, and management predicts 10% fewer then 2023. Meanwhile another supplier, hull maker Spirit AeroSystems (a company that Boeing spun off and is now planning to buy back), is burning cash and has warned investors that it may not be able to continue as a going concern.

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Increasing aircraft production won’t be easy, and it could be expensive if Boeing is forced to pump money into Spirit and/or wait for suppliers to join the planned production increases. To make matters worse, Boeing’s defense division continues to lose money due to billions in costs for fixed-price development programs. Improving EAC processes will take time and will not impact projects already in progress.

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The commercial aerospace industry operates in cycles. New aircraft are being released (the latest large narrowbodies are the Boeing 737 MAX and Airbus A320neo), generating cash over a number of years as deliveries increase. Furthermore, when this happens, profit margins increase because unit production costs tend to decrease.

As revenues and money increase, aircraft manufacturers begin to invest in developing a new generation of aircraft to stay competitive.

Unfortunately, the 737 MAX’s cash-generating cycle has hardly gone as planned since its first delivery in 2017. The fallout from the grounding of the 737 MAX after two catastrophic accidents, the pandemic and subsequent supply chain difficulties have led to significant cash outflows at Boeing, while debt has piled up.

When considering Boeing’s valuation and even accepting a return to significant cash generation, investors should consider what kind of financial position it will be in ten years from now when it has to start investing and preparing for a new aircraft to hit the market comes.

There is upside potential for Boeing stock, but it’s unlikely this will be the kind of buy-and-hold stock that will make investors fortunes. There are too many risks and it appears Boeing will miss much of the cash generation phase with the 737 MAX. So it will suit investors looking for a recovery story, rather than long-term investors willing to buy and forget.

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Lee Samaha has no positions in the stocks mentioned. The Motley Fool recommends GE Aerospace. The Motley Fool has a disclosure policy.

Can buying Boeing stock today be a lifetime guarantee? was originally published by The Motley Fool