Boeing: Invest Or Avoid?

Should you invest in Boeing right now? Well, it depends. On the one hand, Boeing is a globally recognised aerospace giant with a strong history, technological prowess, and market presence. The company has a diverse portfolio, operating in commercial airplanes, defence, aerospace, and security sectors. The surge in travel demand post-pandemic is a tailwind for the company, and its stock is up 33% year-to-date, outperforming the market. Analysts remain bullish on Boeing, and the company's long-term prospects in the aerospace industry look promising.

On the other hand, Boeing has faced several challenges recently. The company has suffered quality control issues and delivery delays with its commercial airplane business, and its defence business is struggling to return to profit. Boeing's stock is down 23% in 2024, and there are question marks around its medium-term outlook. The company's financial performance has been mixed, with revenue growth but weak profit margins.

So, should you invest in Boeing right now? It depends on your risk appetite and investment horizon. Boeing appears to be a good value proposition, but cautious investors may want to wait until management provides more guidance for 2024 and addresses some of the company's current challenges.

Boeing's defence business struggles

Boeing's defence business has been facing challenges, with a series of setbacks impacting its performance. The defence unit has struggled to turn a profit, incurring significant losses. In 2023, the unit absorbed $4.4 billion in losses, yet it has continued to face difficulties in 2024.

The issues facing Boeing's defence business can be attributed to several factors, including supplier errors, high manufacturing costs, and fixed-price contracts. The company is locked into contracts that require them to bear the burden of cost overruns, which has led to losses on programmes like the next Air Force One and NASA's Starliner capsule. These losses have raised questions about Boeing's understanding of costs and ability to manage expenses.

The defence unit's losses include substantial charges in the third quarter of 2023, such as a $482 million loss on building two Air Force One planes and a $315 million charge on a satellite program. As a result, the unit's operating margin was negative 16.9% in the quarter. Boeing's executives have acknowledged the challenges and are implementing measures to improve performance, aiming for positive margins by 2025-2026.

Boeing's defence business also faces competition from other defence contractors, such as Lockheed Martin, General Dynamics, and RTX. Unlike Boeing, these companies have benefited from increased demand due to the war in Ukraine. Boeing's struggles with its defence unit have contributed to a challenging start to 2024 for the company, causing uncertainty among investors.

Boeing's commercial airplane issues

Boeing's commercial airplanes segment has been facing several issues. The company's 737 MAX jets were involved in two fatal crashes, which resulted in a crisis for the company and the ousting of Kevin G. McAllister, who was the first outside recruitment in Boeing Commercial Airplanes (BCA) history. The 737 model has continued to face problems, with manufacturing quality issues on fuselages supplied by Spirit AeroSystems. A recent blowout on a fuselage on an Alaska Airlines flight has further impacted the company's delivery outlook.

In addition to the issues with the 737 model, Boeing has also faced problems with its 787 planes, which resulted in a brief halt in production. The company's commercial aircraft business has been a significant revenue generator, but it has suffered due to the serious mechanical issues affecting some of its models.

Boeing's BCA segment is responsible for designing, assembling, marketing, and selling commercial aircraft, including the 737, 767, 777, and 787 models. The segment supplies jetliners to meet the varying requirements of global airlines for transporting passengers and cargo. While Boeing has taken action to address the issues with its commercial airplanes, the recent setbacks have impacted the company's reputation and stock price.

The issues with the 737 and 787 planes have resulted in a net loss attributable to Boeing's shareholders, with a reported loss of $2.2 billion for the 2023 fiscal year. The company's revenue, however, increased by 16.79% year-over-year to $77.79 billion. The commercial airplanes segment's loss from operations narrowed to $1.64 billion in 2023, with revenue rising 30.26% year-over-year to $33.90 billion. Despite the issues, Boeing's commercial airplanes segment remains a crucial part of the company's business, and addressing these issues is essential for the company's long-term success.

Boeing's market presence

Boeing is a major player in the aerospace and defence industries, with a diverse portfolio that includes commercial airplanes, defence equipment, space exploration, and global services. The company's market presence is significant, and it is well-known for its iconic planes such as the 737, 747, and 787 Dreamliner. As one of the largest aerospace companies globally, Boeing has a competitive advantage due to its history, technological prowess, and brand recognition.

Boeing operates in three to four main segments, depending on the source: Commercial Airplanes, Defense, Space & Security, and Global Services. The company's commercial airplanes segment competes directly with Airbus in producing aircraft that can carry more than 130 passengers. Meanwhile, the defence, space, and security segment goes up against Lockheed, Northrop, and several other firms in the development of military aircraft and weaponry. Boeing's global services division provides aftermarket support to airlines, ensuring a continuous revenue stream and strengthening the company's relationship with its clients.

Boeing's market outlook and analysis are highly regarded in the industry. The company shares its annual outlook for the commercial and cargo markets, providing long-term predictions based on economic, airline, travel, and fleet data. This expertise allows Boeing to make informed decisions and adapt to evolving trends and variables, ensuring it remains a key player in the markets it serves.

In terms of market performance, Boeing's stock has been on an upward trajectory. As of December 2023, the company's stock was up 33% year-to-date, outperforming the S&P 500 Index and the iShares U.S. Aerospace & Defense ETF. This surge in stock price can be attributed to the increased travel demand post-pandemic and the subsequent boost in airline stock performance.

Despite facing challenges, such as the 737 MAX grounding between 2019 and 2020, Boeing has demonstrated resilience. The company has since resumed deliveries of the 737 MAX and secured significant orders from airlines like Lufthansa Group and Ryanair. Boeing's ability to navigate setbacks and its position as a leading aerospace company make it an attractive investment option for those with a long-term perspective and a good risk appetite.

Boeing's stock value

Starting with the positives, Boeing's stock is up 33% year-to-date, outperforming the S&P 500 Index's gain of 24%. The company's commercial aircraft business is seeing a rapid surge in demand, with revenue jumping 25% year-over-year to $7.9 billion in Q3. This includes orders from notable airlines such as Ryanair, United Airlines, and Saudi Arabian Airlines. Additionally, sales in the defense and space segments increased 3.3% year-over-year to $5.5 billion.

However, Boeing has also faced several issues. The company's defense business continues to suffer from margin pressure, with ongoing supply chain issues and soaring raw material and labour costs impacting its ability to deliver on margin. The 737 MAX grounding between 2019 and 2020 due to fatal crashes was a significant setback, and while deliveries have resumed, the recent quality control issues and delivery delays on the 737 model have raised concerns.

Despite these challenges, Boeing's management has retained its medium-term targets, aiming for $10 billion in free cash flow (FCF) in the 2025/2026 time frame. The company's market cap is currently $128 billion, so achieving the FCF target would put it at attractive valuations. Boeing also has a multiyear backlog in place, and its competitor, Airbus, is also facing challenges in ramping up production to meet demand.

Wall Street remains bullish on Boeing stock, with a "strong buy" rating overall. The average analyst target price for BA is $273.67, indicating an upside potential of 5.3% over the next 12 months. However, with the recent issues and uncertainties, cautious investors may want to wait for more clarity on the company's 2024 guidance and the viability of its long-term targets before investing.

Boeing's cash flow

The company's cash flow has been impacted by issues in its defense business, including supply chain problems, soaring raw material and labour costs, and costly charges and cost overruns in fixed-price development programs. These factors have resulted in negative operating margins for the defense business.

On the positive side, Boeing's commercial aircraft business is seeing a rapid surge in demand, with revenue jumping 25% year-over-year to $7.9 billion in Q3. The company has also resumed deliveries of the 737 MAX and expects to deliver between 375 and 400 aircraft in 2023. This includes a significant order of up to 100 737 MAX jets from Lufthansa Group, valued at $9 billion.

Despite the challenges, Wall Street remains bullish on Boeing stock, with a majority of analysts rating it a "strong buy". The average analyst target price for Boeing stock indicates an upside potential of 5.3% over the next 12 months, with a Street-high target price implying 23% growth from current levels.

Overall, while Boeing's cash flow has been a concern, the company expects to turn positive FCF in the near term, and the strong demand for its commercial aircraft could drive revenue growth in the coming years.

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