The idea behind buying Boeing (BA 0.19%) stock is simple. Despite its troubles in recent years, the aviation giant remains in an effective duopoly in the commercial aerospace jet market with Airbus. It also has a $5 million backlog, representing more than seven years of its expected sales in 2024. The ingredients for a recovery are in place, and so is a new chief executive officer, Kelly Ortberg, appointed in the summer to lead a turnaround at the company. Is it enough to make Boeing a compelling stock for long-term investors?
Boeing's recovery
The stock certainly has upside potential, and as previously discussed, it doesn't rely only on ramping up 737 MAX production and working through problematic fixed-price development programs in its defense business. Those are critical elements of a recovery and are in Boeing's hands, too.
However, the new CEO could restore a lot of faith among investors in other ways, such as by resetting investor expectations to more realistic targets than $10 billion in free cash flow for 2025/2026, a target set by Ortberg's predecessor, Dave Calhoun. Similarly, Ortberg is on record saying Boeing's defense business needs to improve its estimate-at-completion (EAC) processes -- if a company can't get its internal EAC right, it's highly likely to disappoint investors with its external guidance. In addition, Ortberg is taking the opportunity to review the portfolio, and the possibility of restructuring the company could generate value for investors.
Putting it all together, it's clear that much of what Boeing needs to do is in its own hands, and management has multiple ways to add value for investors. There's always the cyclical risk of an economic slowdown and its impact on airplane orders, but Boeing is essentially a self-help story.
Image source: Boeing.
Risk and reward for Boeing
The company has upside potential, but is it an investment that can set you up for life? Frankly, that looks unlikely, for two reasons:
- Boeing faces many obstacles on its way to recovery.
- A long-term investor must consider that the stock's valuation reflects the necessity of investing in the next cycle of airplanes
The risks and headwinds are significant. Persistent supply chain difficulties in the aerospace sector are creating challenges for aircraft manufacturers and suppliers alike, and those headwinds will make it difficult and expensive to ramp up production. For example, consider that GE Aerospace started the year expecting to deliver 20%-25% more LEAP engines (used to power the Boeing 737 MAX and the Airbus A320neo family) in 2024 than in 2023. Fast-forward to the third quarter, and its management predicts 10% less than 2023. Meanwhile, another supplier, fuselage maker Spirit AeroSystems (a company Boeing plans to buy back), is burning cash and has warned investors it might not be able to continue as a going concern.
Increasing airplane production won't be easy, and it might prove expensive if Boeing is forced to pump cash into Spirit and/or wait for suppliers to align with planned production hikes. To make matters worse, Boeing's defense business continues to lose money because of multibillion-dollar charges on fixed-price development programs it still needs to work through. Improving its EAC processes will take time and won't affect projects already in progress.
Image source: Getty Images.
The next generation of airplanes
The commercial aerospace industry works in cycles. New airplanes are released (the latest major narrowbodies being the Boeing 737 MAX and Airbus A320neo), which generates cash over several years as deliveries increase. Moreover, as this happens, profit margins widen as the unit cost of production tends to fall.
As earnings and cash build up, airplane manufacturers start investing in developing a new generation of airplanes to stay competitive.
Unfortunately, the 737 MAX's cash-generating cycle has hardly gone as planned since the first delivery in 2017. The impacts of the 737 MAX groundings after two catastrophic accidents, the pandemic, and subsequent supply chain difficulties have caused significant cash outflows at Boeing while debt has piled up.
BA Free Cash Flow data by YCharts
When considering Boeing's valuation and even accepting a recovery to significant cash generation, investors need to consider what kind of financial position it will be in 10 years from now when it needs to start investing and preparing for a new airplane to enter the market.
A stock to buy?
There's upside potential for Boeing's stock, but this is unlikely to be the kind of buy-and-hold stock that will make investors' fortunes. There are too many risks, and it looks like Boeing will miss out on much of the cash-generation phase with the 737 MAX. Consequently, it will suit investors looking for a recovery story rather than long-term investors willing to buy and forget.
