Despite a challenging year, Boeing (NYSE:BA)’s stock has managed to rise by 11% in 2023, reflecting low investor expectations rather than confidence in the company’s performance. The recent presentation by CFO Brian West at the Jefferies Industrial Conference unveiled updates that could affect the company’s investment potential.
West highlighted that progress on the objectives laid out by Boeing’s management during an investor conference in November 2022 has been less than satisfactory this year. The plan was primarily focused on generating free cash flow (FCF) to reduce the company’s debt and position it for potential investments in new airplane development. Targets included achieving $3 billion to $5 billion in FCF in 2023 and $10 billion between 2025 and 2026, a significant increase from the $2.3 billion reported in 2022.
The planned improvement was to be driven by several factors, including a boost in production of the 737 model from an estimated 400 to 450 deliveries in 2023 to a monthly rate of 50 by 2025/2026, translating to an annual rate of 600. However, West pointed out that delivery of the targeted units is expected to be at the lower end of the range due to manufacturing issues identified on fuselages supplied by Spirit AeroSystems (NYSE:SPR). This marks the second time that Boeing has experienced delivery delays due to fuselage problems.
Additionally, supply chain and labor issues continue to affect Boeing Defense, Space & Security (BDS), which was tasked with overcoming these challenges, mitigating risks associated with fixed-price programs, returning to profitability, and generating $2 billion in operating cash flow by 2025/2026. Both BDS and Boeing Commercial Airplanes (BCA) are expected to post negative profit margins in the third quarter.
Regarding BDS, West outlined a three-pronged strategy during the second-quarter earnings call in July, focusing on maintaining stability and improving productivity in the 60% of the business that was performing well. The next 15% was tied up in problematic fixed-price programs expected to be largely risk-free by the end of 2024, and the remaining 25% consisted of underperforming legacy programs.
However, West acknowledged during the recent conference that turning around the underperforming 25% was taking longer than expected. Moreover, new pressure has emerged on the fixed-price development contracts that make up 15% of the revenue base.
Despite these setbacks and doubts surrounding Boeing’s ability to meet its 2023 targets, the stock remains appealing based on its 2025/2026 targets. Investors should closely scrutinize third-quarter earnings and updated guidance as they could indicate further setbacks for Boeing in 2023