Boeing‘s CFO, Brian West, recently presented at the Bank of America Global Industrials Conference, shedding light on the company’s 2024 plans. Delving into Boeing’s stock requires a comprehensive understanding of the present scenario and its ramifications on the future. Thus, dissecting West’s presentation is crucial for discerning investors seeking to navigate Boeing’s trajectory.
Shifting Boeing’s Operations
An incident on Jan. 5 involving a panel on a Boeing plane during an Alaska Airlines flight triggered a series of events with significant implications. From FAA audits on Boeing and fuselage supplier Spirit AeroSystems to Boeing’s internal operational reassessment, the aftermath of the incident prompted Boeing’s management to pivot its operational strategies. West outlined four pivotal changes during his presentation.
Primarily, West emphasized the imperative of a “step change improvement in how we think about traveled work.” This refers to work processes either delayed or completed in different locations. For instance, Boeing terminated “travel work” between Wichita and Renton in March and will now only accept fully conforming fuselages from Spirit AeroSystems. The latter, a former segment of Boeing, provides fuselages for the 737 MAX.
Secondly, he articulated that Boeing opted to decelerate 737 MAX production to implement modifications and enhance quality control.
Thirdly, he mentioned Boeing’s intent to harmonize its supplier network, requiring some suppliers to catch up with production timelines while others need to throttle down.
Lastly, he acknowledged Boeing’s overextension in outsourcing and hinted at the possibility of reabsorbing Spirit AeroSystems through a mixed cash and debt funding model.
Interpreting the Significance
From the presentation, two crucial implications emerge:
- The points discussed appear to strain Boeing’s cash flow and inflate its debt, posing challenges for future investments in novel aircraft development.
- Reduced cash generation hampers Boeing’s capacity to pursue a new aircraft for the upcoming aviation era.
Image source: Getty Images.
Boeing’s Financial Outlook
According to Boeing’s Investor Day in November 2022, the company aims to amass $10 billion in free cash flow (FCF) between 2025 and 2026. The strategy involves ramping up 737 production to 50 aircraft per month and elevating the profit margins of the Boeing Defense, Space & Security (BDS) sector from a negative 7.1% in 2023 to high single digits.
However, with West projecting low-single-digit billion FCF for 2024 and current 737 production rates below 38 per month, Boeing faces challenges in meeting the $10 billion FCF target by 2025. While West conceded that achieving the goal might be delayed, it remains feasible within the 2025-2026 timeframe.
Nevertheless, the operational adjustments discussed earlier are poised to strain cash flow and increase debt. Acquiring Spirit could heighten debt levels, potentially compounding Boeing’s FCF hurdles.
SPR Free Cash Flow data by YCharts
Moreover, discontinuing “traveled work” and moderating 737 production speed exert added pressure on cash flow. Enhancing supplier collaboration might lead to working capital constraints as Boeing juggles inventory buildup from some suppliers against delays from others. These trends collectively signal a deteriorating cash flow and debt scenario for Boeing.
Innovation in Aircraft Development
Cash plays a vital role as developing a new plane demands substantial time and financial resources. Boeing’s CEO has projected that a new aircraft won’t surface until 2035. West reiterated the need for a 20% to 30% boost in airplane efficiency derived from “engine technology and aerodynamic investment” before introducing a new aircraft.
Nonetheless, Boeing faces stiff competition. For instance, China’s Comac C919 aircraft utilizes LEAP engines from a GE joint venture, while Brazil’s Embraer E2-195 leverages geared turbofan engines from RTX’s Pratt & Whitney. These contenders could seize market share in burgeoning aviation segments by leveraging cutting-edge engine technology.
Evaluating Boeing’s Investment Appeal
While Boeing holds promising prospects with $10 billion FCF potential and an extensive order backlog, escalating risks warrant caution. A downturn in the aviation sector could exacerbate Boeing’s debt woes and impede its ability to spearhead new aircraft development over the next decade. Consequently, channeling investments towards Boeing’s suppliers, instead of the company itself, appears prudent at present.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America. The Motley Fool recommends Alaska Air Group and RTX. The Motley Fool has a disclosure policy.
