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.
