With Boeing (BA 1.96%) stock down by nearly a third this year, it's natural that value investors will, at least, start considering buying in. Indeed, there's a compelling case for buying the stock because it still has a multiyear backlog and a significant business moat. Is it enough to make the stock a buy?
Boeing's headline recovery
Boeing's path to recovery is intricately tied to its management's actions. Its ability to increase delivery rates on the 737 MAX and 787 and resolve the manufacturing quality issues will be crucial in turning the company's fortunes around.
NYSE: BA
Key Data Points
However, that's not the only operational issue that needs addressing. The defense segment poses a challenge, as management needs to restore profitability to Boeing's defense, space, and security (BDS) segment while aiming for the medium-term target of high-single-digit profit margins.
While the factors for Boeing's potential recovery are evident, three specific moves from management in the second half could lead to a spectacular recovery for the stock.
Ditch the target of $10 billion in free cash flow
After telling investors in March it expected full-year free cash flow (FCF) in the low-single-digit billions, Boeing's management, namely CFO Brian West, lowered those expectations to an FCF "burn" in 2024 at an investor conference in late May.
However, management hasn't abandoned its long-held target of $10 billion in FCF in 2025/2026, although it has said the target would be hit later than initially expected.
The Wall Street analyst consensus is for Boeing to hit $8.2 billion in FCF in 2026, but the company needs to overcome a host of growing cash-flow headwinds even before hitting that figure. If Wall Street analysts are correct, Boeing's management must lower the target to restore credibility with analysts and investors.
Image source: Getty Images.
This is just not a number that investors pencil into valuations (although that's extremely important in itself); there's an issue that the same management predicting X airplane deliveries is also predicting Y in FCF in 2026. If Y looks untenable, then investors have reason to question X.
Experienced aerospace investors will remember how former General Electric CEO Jeff Immelt departed the company, still clinging to the 2018 target of $2 in earnings per share (EPS) in 2018. The company would end up reporting $0.65 in adjusted EPS in 2018.
Of course, Boeing may well hit the $10 billion target, but investors need to factor in what could happen to the share price if management keeps guiding to a target it won't hit.
Appoint a new CEO
Current CEO David Calhoun is set to leave at the end of the year and Boeing's heavyweight board still hasn't appointed a new CEO. Appointing a new leader is a significant enough issue for any company, let alone one that faces considerable scrutiny over its operational performance.
It's also an issue in an industry where CEOs matter a lot. It was only after Larry Culp was elected CEO of GE, now GE Aerospace, that the company began its march toward creating value for shareholders. Similarly, the chart below shows the negative (and overly harsh) market reaction to the April appointment of Tome Gentile, the former CEO of Spirit AeroSystems (a troubled Boeing supplier), as CEO of aerospace materials supplier Hexcel.
CEOs matter, and Boeing needs to appoint a new CEO.
Shore up delivery rate targets
Boeing delivered 67 of its 737 planes in the first quarter and management expects a similar number in the second quarter, and then a big ramp-up to 38 a month by the end of the year.
However, to get there, it will need its suppliers, notably fuselage supplier Spirit AeroSystems, to be in sync. To that end, Boeing is in negotiations to buy Spirit, and a deal may well be complete by the time this article is published.
If a deal is reached, Boeing will still need to reassure investors that Spirit can ramp up production in accordance with Boeing's goals.
Image source: Getty Images.
Can Boeing come back in the second half?
The short answer is "yes," and the long answer is, in the author's opinion, "yes, but only if it does the three things outlined above first." There's an opportunity for Boeing, but it makes sense to monitor events closely before investing heavily, and cautious investors will avoid the stock until there's more clarity on these three key issues.
