To Buy or Not to Buy: Decoding Neutral Rating on Boeing (BA) Stock

Last week, BofA Securities analyst Ronald Epstein lowered his price target from $225 to $210 on The Boeing Company (BA) stock. The analyst also maintained a Neutral rating on the stock after a presentation by the aerospace giant’s Chief Financial Officer and Executive Vice President, Brian J. West. The presentation occurred last Wednesday at the Bank of America Global Industrials Conference.

Boeing’s Near-Term and Medium-Term Outlook

Brian West’s recent presentation hinted at potential shifts in Boeing’s cash flow and debt structure, as highlighted by BofA Securities. Due to the company’s decision to retain airplanes for a longer duration and comprehensively address traveled work, BA anticipates a negative impact on revenue, earnings, and cash flows for both the quarter and the year.

During the quarter, Boeing’s free cash flow usage is projected to be between $4 billion and $4.50 billion, higher than its initial January estimates. This increase in cash outflow is driven by lower deliveries, reduced volume at Boeing Commercial Airplanes (BCA), and a negative mix from inventory airplanes.

Additionally, some working capital pressures, including inventory challenges and receipt timing, will affect the aviation company’s financial performance in the short term and may not fully recover by the end of the year. 

Boeing has not been able to effectively address near-term financial outcomes due to the work surrounding its stability.

West added in the presentation that BA’s long-term strategy prioritizes generating cash flow post-investments in its growth initiatives, followed by reducing debt on its balance sheet. Maintaining an investment-grade rating remains a key priority.

Although achieving the targeted $10 billion free cash flow will take longer than initially anticipated, likely extending into the 2025-2026 timeframe, the company believes its current actions will enhance our long-term positioning and stability.

Moreover, Boeing's defense business is also a focal point of concern. Previously, in October, West expressed confidence in the defense segment’s contribution toward achieving the $10 billion free cash flow target, albeit slightly lower than expected.

However, acquiring Spirit AeroSystems Holdings, Inc. (SPR) is expected to raise Boeing’s consolidated debt, which currently stands at $52.30 billion, potentially leading to heightened cash flow challenges. Spirit has faced outflows in recent years, and there is also a need to enhance manufacturing quality.

Bottom Line

BA’s fourth-quarter 2023 results beat analysts’ expectations. For the quarter that ended December 31, 2023, Boeing’s revenue came in at $22.02 billion, surpassing analysts’ estimate of $21.08 billion. This compared to revenue of $19.98 billion in the same quarter of 2022.

BA’s core operating earnings were $90 million, compared to a core operating loss of $642 million in the prior year’s quarter. The company also posted a core loss per share of $0.47, compared to the consensus estimate of $0.79, and narrowed 73.1% year over year. However, its free cash flow came in at $2.95 billion, down 5.8% from the previous year’s period.

Despite topping analyst estimates in the last reported quarter, the aerospace company holds off on its 2024 guidance as it grapples with the fallout from an accident involving an Alaska Airlines 737 Max 9, which suffered a door “plug” blowout during a flight in early January.

“While we often use this time of year to share or update our financial and operational objectives, now is not the time for that,” Boeing CEO Dave Calhoun said in a message to employees. “We will simply focus on every next airplane while doing everything possible to support our customers, follow the lead of our regulator and ensure the highest standard of safety and quality in all that we do.”

Further, BA CFO Brian West recently spoke at the Bank of America Global Industrials Conference, where he reassessed the company’s medium-term and long-term financial outlook and strategic decisions and hinted at several concerning factors.

West talked about the anticipated negative impact on revenue, earnings, and cash flows for the quarter and the year due to the company's decision to retain airplanes longer and address traveled work comprehensively. He added that the increase in cash outflow in the quarter is attributed to fewer deliveries, decreased volume at BCA, and an unfavorable mix of inventory aircraft.

Moreover, working capital pressures, including inventory challenges and receipt timing, are expected to persist in the short term and may not be fully recovered by the end of the year, leading to a lower full-year free cash flow projection.

Despite challenges in managing near-term financial outcomes due to stability concerns, the company is committed to strengthening its position, achieving long-term targets, and enhancing predictability for our customers and investors. However, this process will require time and concerted efforts.

The recent presentation highlighted several challenges, including anticipated adverse impacts on the company’s cash flow and debt profile. Given the current circumstances, BofA Securities’ decision to revise the price target on BA stock and adopt a cautious stance with a “Neutral” rating seems justified.

Therefore, waiting for a better entry point in this stock could be wise now.

AAL’s Ambitious Change: What Investors Need to Know

With rapid technological advancements and travelers' evolving demands, the aviation sector is experiencing unprecedented growth and expansion. American Airlines Group, Inc. (AAL), a frontrunner, has unveiled plans to expand its fleet, underscoring its dedication to staying ahead in this dynamic landscape.

Comprehensive Fleet Expansion Breakdown

AAL, earlier this month, announced orders for about 260 new aircraft, including 85 Airbus A321neo, 85 Boeing 737 MAX 10 and 90 Embraer E175. Also, the orders encompass options and purchase rights for an additional 193 aircraft. Under the Boeing order, American Airlines has chosen to convert 30 of its existing 737 MAX 8 orders into 737 MAX 10 aircraft.

These orders from Airbus SE (EADSY), Boeing Company (BA), and Embraer S.A. (ERJ) form a vital component of American Airlines’ ongoing commitment to enhance premium seating options across its narrowbody and regional fleets. They also serve to bolster the airline’s domestic and short-haul international network, contributing to its long-term sustainability and competitiveness.

“Over the past decade, we have invested heavily to modernize and simplify our fleet, which is the largest and youngest among U.S. network carriers,” stated American Airlines’ CEO Robert Isom. “These orders will continue to fuel our fleet with newer, more efficient aircraft so we can continue to deliver the best network and record-setting operational reliability for our customers.”

Since 2014, AAL has received more than 60 mainline and regional aircraft. With the recent announcement, American Airlines now has around 440 aircraft on order, ensuring its aircraft order book extends into the next decade.

“As we look into the next decade, American will have a steady stream of new aircraft alongside a balanced level of capital investment, which will allow us to expand our network and deliver for our shareholders,” said American’s Chief Financial Officer Devon May.

Boosting Regional Fleet Capacity

AAL is prioritizing the integration of larger, dual-class regional aircraft into its fleet, a move aimed at enhancing connectivity from smaller markets to the airline’s global network. The airline has set a goal to retire all its 50-seat single-class regional jets by the decade’s end while ensuring continued service to small and medium-sized markets with larger regional jets.

Upon the completion of deliveries of Embraer E175 aircraft, American Airlines foresees its entire regional fleet being comprised of dual-class regional jets featuring premium seating, high-speed satellite Wi-Fi, and in-seat power amenities. American’s wholly-owned regional carriers will operate the new E175 aircraft, further solidifying the airline’s commitment to modernizing its regional operations.

Arjan Meijer, CEO of Embraer Commercial Aviation, said, “The E175 is truly the backbone of the U.S. aviation network, connecting all corners of the country.”

“One of the world’s most successful aircraft programs, the E175 was upgraded with a series of modifications that improved fuel burn by 6.5%. This modern, comfortable, reliable and efficient aircraft continues to deliver the connectivity the U.S. depends on day after day. This represents American’s largest-ever single order of E175s, and we thank American for its continued trust in our products and people,” Meijer added.

Improvements to Existing Aircraft for a Premium Travel Experience

In addition to the new fleet, AAL has announced plans to initiate retrofitting of its A319 and A320 aircraft, commencing in 2025, in response to heightened customer demand for premium travel experiences. The retrofit program aims to revamp the interiors, featuring power outlets at each seat, expanded overhead bins, and refreshed seats with updated trim and finishes.

Under this initiative, American’s A319 fleet will undergo modifications to accommodate additional premium seating, raising the count to 12 domestic first-class seats. Similarly, the A320 fleet retrofits will see an increase in domestic first-class seating to 16.

Through the combination of retrofitting existing aircraft and the anticipated arrival of new aircraft, American Airlines projects a growth of over 20% in premium seating across its fleet by 2026.

Strategy for Long-Term Growth and Value Creation

On March 4, 2024, AAL’s CEO Robert Isom and other senior leaders provided an update at 2024 Investor Day in New York on the airline’s performance and its path forward for long-term growth and value creation.

“I’m incredibly proud of the work we have done over the past two years to build an American that is stronger, more focused and well-positioned to realize our full potential,” said Robert Isom. “Today, with our key initiatives in place, American is positioned to deliver a reliable operation for customers while generating durable earnings over the long term. We’re excited for the path ahead and confident in our ability to drive value for our shareholders through our commercial initiatives and continued execution.”

Also, American Airlines provided insights into the financial targets it had set for 2024 through 2026 and beyond. For 2024, the airline expects adjusted EBITDAR margin growth of nearly 14% year over year, free cash flow of about $2 billion, and total debt of $41 billion.

American Airlines targets adjusted EBITDAR growth of approximately 14%-16% for the year 2025, free cash flow of greater than $2 billion, and total debt of nearly $39 billion. For 2026 and beyond, the airline projects adjusted EBITDAR growth of around 15%-18%, free cash flow of greater than $3 billion, and total debt of less than $35 billion.

AAL’s members of the senior leadership team also discussed the drivers of its value-creation opportunities, such as operating a transformed fleet that is simplified and optimized for efficiency, capitalizing on competitive advantages of its network poised to adapt to evolving consumer trends, attracting and retaining customers with travel rewards program AAdavantage®, and generating durable financial results.

Bottom Line

AAL’s recent orders for Airbus, Boeing, and Embraer aircraft will allow the airline to expand premium seats across its narrowbody and regional fleets and bolster its domestic and short-haul international network for sustained long-term growth. Further, American is expected to retrofit its A319 and A320 fleets starting in 2025, increasing the number of domestic first-class seats on each aircraft.

These strategic investments in fleet modernization, operational efficiency, and customer experience enhancement demonstrate American Airlines’ commitment to meeting evolving industry demands. This, in turn, could lead to enhanced revenue streams and passenger satisfaction, contributing positively to the company’s growth trajectory.

By upgrading its fleet, AAL can further enhance its competitive position in the market, especially by offering a superior travel experience compared to its rivals. This could help the airline capture a larger market share and strengthen its position as a leading player in the aviation industry.