Another quarter and another quietly positive earnings report have come from the aerospace giant. Boeing (BA 0.82%) certainly has challenges to work through this year. Still, under CEO Dave Calhoun, Boeing is quietly regaining the trust of investors, and merely executing its medium-term plans could lead to substantive share price appreciation. Here’s how Boeing is becoming investable again.
Boeing’s game plan
Management lauded its return to free cash flow (FCF) generation in 2022, with $2.3 billion generated, compared to an outflow of $4 billion in 2021 and a whopping $20 billion outflow in 2020.It’s a good result in the context of the company’s plan to generate $10 billion in FCF at some point between 2025 & 2026.
The company’s CFO, Brian West, put it succinctly on the recent earnings call, saying that “the overall plan continues to be, deliver airplanes, generate cash, pay down debt.” It’s not hard to see why. Due to the combination of the well-documented grounding of the 737 MAX, followed by the imposition of travel restrictions globally, Boeing’s earnings and cash flow slumped while its debt ballooned.
As such, its long-term debt now stands at $57 billion, with $17.2 billion in cash and marketable securities. Paying down debt is not only essential to improving Boeing’s balance sheet, but the company also needs cash and liquidity to fund new airplane development programs. The subject matter came up at the investor day conference in November. Calhoun’s comments at the event implied there wouldn’t be a new airplane (possibly a mid-market plane) until the middle of the next decade; it takes years and billions of dollars to develop a new airplane. That’s particularly the case if Boeing follows Calhoun’s aim of ultimately introducing a place that differentiates itself from the airplanes preceding it.
The bottom line is that Boeing needs to generate cash flow.
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Boeing makes progress
To generate cash flow, Boeing needs earnings, and to generate earnings, Boeing needs revenue from airplane deliveries. It’s not just about revenue; production ramps are also a significant part of how Boeing expands its profit margin. Boeing also needs to avoid more multibillion cost overruns on its defense projects, notably the high-profile fixed-price projects like Air Force One, the T-7 (pilot training plane), and the KC-46 (air refueling tanker) that have caused problems.
Frankly, any quarter with no bad news from Boeing Defense, Space & Security is good news as it marches toward de-risking these programs by 2025.
As for Boeing Commercial Airplanes and deliveries, the news is mixed. Its fourth-quarter deliveries were better than expected, but Calhoun served to temper any enthusiasm that Boeing could improve on its current schedule. In a nutshell, he said supply chain issues were still a major issue, but Boeing was sticking with its guidance for 400 to 450 deliveries of Boeing 737 aircraft in 2023.
Calhoun noted, “we continue to face a few too many stoppages in our lines” and “while they are coming down, [stoppages] are not where they need to be as we think about stable rates going forward.” In other words, Boeing is still suffering from supply chain issues that limit its production line to work optimally. As such, investors can expect Boeing’s delivery data to be choppy from month to month — you have been told.
What Boeing’s suppliers are saying
In his opening remarks on the earnings call, Calhoun said he wouldn’t “highlight any one supplier within the supply chain.” Still, it’s hard to avoid any tangential discussion of General Electric (GE 2.29%) when its aerospace business has a joint venture, CFM International, that’s the sole engine manufacturer for the Boeing 737 MAX. Calhoun, a man who spent more than two decades at GE, including a stint heading up GE aircraft engines, says he’s “really happy” with the “transparency with which we are planning for rates with our engine suppliers, and you know who they are and predominantly one.”
It’s also worth noting that GE expects LEAP engines (supplied on the Boeing 737 MAX and the Airbus A320 neo) deliveries to ramp by 50% in 2023 and told investors to get ready for margin compression in 2023 due to the negative margin mix from producing them. Similarly, another major aerospace supplier, Raytheon Technologies‘ (RTX -1.43%) CEO Greg Hayes, recently told investors, “But we don’t see anything in our supply chain today that would prevent us from delivering either at Boeing or Airbus to the rates that they need.” However, he also took a cautious stance on the supply chain issues that have troubled the sector.
What it means for Boeing investors
Having seen supply chain issues extend far longer than many expected in 2022, it’s understandable that aerospace CEOs are being temperate on guidance in 2023. That’s fair enough, and it makes sense to take what they say at face value. Still, even on merely hitting its cash flow targets, Boeing looks a good value, and the lack of any new news at defense is a plus. As such, Boeing’s stock remains attractive.