Boeing’s long-term prospects are significantly tied to its development of next-generation narrowbody airplanes to replace the 737 MAX. This necessity was subtly acknowledged by CEO Kelly Ortberg during his initial earnings call in October, emphasizing the importance of rebalancing the financials to pave the way for new commercial aircraft. Key insights for potential long-term investors are discussed below.
### An Investment in a Long Cycle
The creation of new aircraft requires many years and substantial financial resources, a reality for the forthcoming generation of narrowbody aircraft. Previous CEO Dave Calhoun indicated that Boeing might not release a new airplane until the mid-2030s, necessitating a potential $50 billion investment.
Although a decade might seem distant, it’s crucial for investors to focus on Boeing’s financial standing. Typically, industries with long cycles experience significant investments upfront, leading to initial aircraft deliveries, followed by a gradual increase in cash flow as deliveries and profit margins grow. This cash is then reinvested in developing future aircraft models.
### Boeing’s Cash Flow and Debt Challenges
The expected cash flow from the 737 MAX, first delivered in 2017, was disrupted by its grounding due to safety issues and the pandemic. This situation is evident from the financial data:
– Initial capital expenditures increased before the first 737 MAX delivery in 2017, impacting free cash flow (FCF).
– As capital expenditures decreased post-2017, Boeing’s FCF improved along with a stable debt situation.
– Subsequent challenges, including a 737 MAX grounding in 2019, the pandemic, the 2024 grounding, production limits, and losses in Boeing Defense, Space & Security (BDS), led to severe cash outflows and increasing debt.
Boeing faces the challenge of funding a potential $50 billion investment with $53.6 billion in consolidated debt at the end of the first quarter, offset by $23.7 billion in cash and marketable securities, resulting in $29.9 billion in net debt.
### Strategies for Achieving Objectives
Improving FCF is crucial, achievable by executing on a $545 billion backlog, increasing 737 MAX production, delivering the 777X by 2026, and restoring BDS profitability and cash flow. These efforts depend largely on internal execution rather than market conditions.
Analysts on Wall Street are optimistic, forecasting FCF to shift from a $3.8 billion outflow in 2025 to an $8.8 billion inflow by 2027 and a reduction of net debt to $18.8 billion. If Boeing returns to an FCF of over $10 billion annually, it could potentially pay off its debt by 2029 and finance a new $50 billion airplane project by the mid-2030s.
### Evaluating Boeing Stock Value
The company must overcome significant challenges, including tariff uncertainties, enhancing 737 MAX delivery rates and quality, staying on course with the 777X, and achieving substantial profitability for BDS. Despite early signs of improvement under Ortberg and a substantial backlog, the stock may not be significantly undervalued. Although valued at $134 billion, generating $6.7 billion in FCF repeatedly is challenging given the investment needs. Thus, while Boeing might appear undervalued, caution is advised, as it is not necessarily a clear buy at present.
