How does Boeing’s future look?

Boeing’s future depends on ramping up the production and delivery of its commercial airplanes. It’s defense business needs to work through some problematic programs. Recovery in commercial flight departures and military contracts should help its global services.

The company needs to start generating more cash, and management set out a plan for doing so during its investor day conference in November 2022. Breaking out each of its business segments, the airplane maker showed how much each one needs to contribute to revenue. This plan highlights the importance of each segment in meeting management’s target of $10 billion in free cash flow (FCF) by 2025 or 2026.

A typical error made by market participants is the “hot hand” fallacy; as described by Dr. Richard Thaler, father of behavioral economics, it can be boiled down to whatever has been happening in the past, letting markets believe that it will continue to occur in the future. Perhaps the CEOs of various manufacturing names suffered from this behavioral error as orders and production capacity took a backseat.

At the same time, most of the attention followed solving liquidity issues and staying open for business. As most natural cycles must return to the mean cyclical value, some companies are returning to their pre-pandemic production levels, and some even surpassing them to overtake competitors who may still be asleep behind the wheel.

When Boeing released its Q1 2023 aircraft delivery update to investors and markets, the company had overtaken its main competitor, Airbus, on a net delivery basis by a small margin, a spread not seen since 2018. This is good news, but Boeing has to be very careful, and focus on what matters.

Here’s a look at why that figure matters so much to Boeing and its investors right now — and what each segment has to do to get there.

Why Boeing’s free cash flow matters
As a reminder, Boeing’s debt ballooned and its FCF collapsed due to the grounding of the 737 MAX as well as pandemic-related lockdowns. Reaching its new FCF goals would help Boeing significantly reduce its $57 billion in long-term debt (or $39.8 billion net) that it currently holds.

However, it isn’t just about reducing debt. Boeing needs to build the financial firepower to support capital investment in new airplanes. Although CEO Dave Calhoun commented recently that Boeing won’t produce a new plane for at least a decade, the reality is that Boeing will need to respond if Airbus develops a new midsized plane that captures market share. To do that, Boeing will need cash.

Boeing’s plan
The key parts of the plan to get to free cash flow of $10 billion by 2025/2026, as laid out in November, are as follows.

Operating Cash Flow:

• Boeing Commercial Airplanes: $2.5 billion to $3.5 billion in 2023 and $9 billion in 2025/2026
• Boeing Defense, Space & Security: ($1 billion) to ($500 million) in 2023 and $2 billion in 2025/2026
• Boeing Global Services: $2.5 billion to $3 billion in 2023 and $3 billion in 2025/2026

Data source: Boeing presentations.

That comes to total operating cash flow goal of $14 billion. However, the company will also need to make various payments (mainly taxes due to returning to profitability) totaling around $2 billion, and a further $2 billion in capital spending. So that leaves a total of $10 billion in operating cash flow.

What Boeing needs to do
As you can see, the critical parts of the plan count on a significant ramp-up in cash generation from the company’s BCA and BDS segments. For Boeing Commercial, the pathway is clear, but so are the potholes. BCA needs to ramp airplane production from a current rate of 31 deliveries per month for the Boeing 737 MAX to a rate of 50 a month. That’s no easy feat, given the ongoing supply chain issues facing the industry.

There are promising signs. The company’s suppliers appear to be cautiously optimistic, but the jury is still out due to the persistence of supply chain issues, which have extended much longer than many thought they would.Ramping airplane production is critical to BCA, not only in revenue, but it’s a significant part of how Boeing improves its profit margin.

For Boeing Defense, the key is to work through some of the problematic fixed-price contracts it has in defense. The segment has suffered multibillion-dollar cost overruns over the years and has taken charges on programs like the KC-46 tanker, Air Force One, and the T-7A Red Hawk (pilot training aircraft). Management believes the KC-46 and Air Force One programs will have passed key milestones by the end of 2024 which will help to reduce risk on them.

As for Boeing Global Services, the key is for ongoing commercial flight departures to support commercial services growth and generate steady revenue from the military.

Anyone investing in Boeing will have to be patient. The Boeing production ramp-up is going to be slow and bumpy. Meanwhile, reducing risk on the problematic Boeing Defense programs is at least a couple of years away. Boeing will need to have all its segments firing on all cylinders to get to $10 billion in FCF by 2025/2026.

As Warren Buffet says, the stock market is a short-term voting machine and a long-term weighing machine. Taking a short-term look-back period comparing the two aircraft manufacturing giants, it becomes obvious who gets the popular vote.

Investors favor Airbus’ outlook over Boeing’s based on the stock performance gaps. The main reason could be attributed to Airbus’s product and customer diversification, which needs to be added to Boeing. Despite the revenue composition differences between the two rivals, Boeing’s guidance and realistic outputs for 2023 and beyond are reason enough to expect a swift closing of this performance gap.