Despite all its issues over the last few years, there's still a robust case for buying Boeing (BA +1.24%) stock. After all, it's still one of only two truly global players in the commercial airplane market and has a $529 billion backlog in place, while continuing to win orders (125 net orders in the first quarter). Is it enough to justify buying the stock? Here's the lowdown.
Boeing's $10 billion target
Investors listen when management lays out medium-term targets. As soon as it does so, investors begin penciling in valuation assumptions. Since everyone knows this, management tends to lay out targets it can meet, and investors closely monitor progress toward the targets.
As such, when Boeing's management laid out its target for $10 billion in free cash flow (FCF) in the 2025/2026 timeframe, it's fair to say everybody expected Boeing to meet the target. The debate was over the timing: Early 2025 or late 2026?
NYSE: BA
Key Data Points
Boeing won't hit the target
According to the Wall Street analyst (never the most critical audience) consensus, Boeing will miss this target, instead hitting $9.3 billion in FCF in 2026. Analyst consensus reflects that Boeing fell behind in its plan in 2023, notably in only delivering 396 Boeing 737 airplanes, compared to the targeted 400 to 450.
It gets worse. The quality control issues and a high-profile incident on an Alaska Airlines flight in January led to the grounding of Boeing 737 Max 9 airplanes and only 67 deliveries of 737 airplanes in the first quarter. For reference, the $10 billion target assumed that Boeing would hit 50 deliveries of 737s every month in 2025/2026.
Nonetheless, Boeing's management still believes it will hit the $10 billion target, with CFO Brian West recently noting: "We continue to expect that this goal will take us longer than we originally planned and later in the '25, '26 window primarily tied to the 737 and 787 production delivery ramps of 50 per month and 10 per month, respectively" on the earnings call.
Image source: Getty Images.
Five reasons hitting the target will be hard
Unfortunately, there are plenty of headwinds Boeing needs to overcome before it gets there.
First, airplane ramps are tricky at the best of times. While the slowdown in deliveries will enable Boeing to overcome supply chain issues dogging the industry, its suppliers must also align themselves to aggressive production jumps.
Second, Boeing's potential acquisition of Spirit AeroSystems may reassure investors that one of its key suppliers (fuselages on the 737) is secure. Still, Spirit requires investment and has bled cash in recent years. That won't help Boeing's FCF aims.
SPR Free Cash Flow data by YCharts
Third, the delivery delays may cause airlines to order from Airbus or even Embraer (smaller airplanes), or insist on heavier discounting from Boeing to reflect the effect on cash flow from the delays. In addition, delivery delays often require compensation payments to airlines.
Fourth, Boeing is moving into summer negotiations with the International Association of Machinists and Aerospace Workers (IAM) over the renewal of a contract that expires in mid-September. Due to previous layoffs, Boeing may struggle to negotiate as skilled workers are in high demand, not least due to the many layoffs leading to workers changing industries during the lockdowns.
The fifth -- and perhaps the most crucial -- point is that maintaining production quality requires significant investment. Boeing cannot sustain itself without ensuring production quality, and the company's management recognizes that its top priority is to guarantee manufacturing quality. While the $10 billion budget target may be open for negotiation, ensuring manufacturing quality control is not.
Is Boeing stock a buy?
There is a case for the stock, but it's not powerful for investors relying on Boeing to hit the $10 billion FCF target in 2026. As such, most investors should avoid the stock until there is clarity on the abovementioned issues or management readjusts its medium-term targets.
