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.

Boeing's Turbulent Week: What Lies Ahead for BA Investors?

Recently, a United Airlines Holdings, Inc. (UAL) aircraft veered off the taxiway into a grassy area upon landing at Houston’s George Bush Intercontinental Airport. The incident, involving United Flight 2477 carrying 160 passengers and six crew members, marks the third notable occurrence last week involving the carrier’s The Boeing Company (BA) planes.

No injuries were reported as passengers disembarked using mobile stairs and were bused to the terminal. The incident last Friday involved a 737 Max, in service for less than a year, built four years ago. This follows a tire loss from a United Boeing 777-200 mid-air last Thursday and an engine failure on a United flight from Houston to Fort Myers, Florida.

The aircraft on the Houston-to-Florida route made an emergency landing when one engine started emitting flames ten minutes post-takeoff. UAL attributed the incident to the engine ingesting plastic bubble wrap left on the airfield before departure.

BA’s series of unfortunate events commenced at the start of the year when a portion of an Alaska Airlines 737 Max detached from the aircraft soon after takeoff. A preliminary federal investigation suggested BA may have neglected to install bolts in the door plug, intended to secure the component and prevent detachment.

Consequently, the incident prompted a temporary nationwide grounding of specific 737 Max jets, leading to congressional hearings, production and delivery delays, and numerous federal investigations, including a criminal probe. The turmoil contributed to a 25% decline in the company's stock value this year, causing a market valuation drop exceeding $40 billion.

Continued Flight Control and Safety-Related Issues

The string of setbacks for BA does not end here. In February, United Airlines 737 Max pilots reported flight control jamming upon landing in Newark, which has been under investigation by the National Transportation Safety Board.

Recently, the Federal Aviation Administration (FAA) also raised concerns about de-icing equipment on 737 Max and 787 Dreamliner models, potentially leading to engine thrust loss. Despite this, the FAA permit continued flying of the planes, with BA asserting no immediate safety threat.

Adding to BA’s woes, last week, the National Transportation Safety Board (NTSB) revealed the company’s failure to furnish records documenting the steps taken on the assembly line for door plug replacement on the Alaska Airlines jet. Boeing’s explanation includes that these records simply do not exist.

The FAA disclosed that BA’s safety and quality concerns transcend mere paperwork deficiencies. FAA Administrator Mike Whitaker stated that upon reviewing BA’s production procedures and standards, the regulator identified significant weaknesses in critical aspects of the company’s manufacturing and assembly processes.

“It wasn’t just paperwork issues,” Whitaker said. “Sometimes, it’s the order the work is done. Sometimes it’s tool management. It sounds kind of pedestrian, but it’s really important in a factory that you have a way of tracking your tools effectively so that you have the right tool and that you know you haven’t left it behind.”

Legal Battle and Whistleblower Retaliation

According to the Charleston County Coroner's Office, a former longtime BA employee, who had previously voiced significant concerns regarding the company’s production standards, was discovered deceased in Charleston, South Carolina, over the weekend.

John Barnett, aged 62, passed away on March 9, citing a self-inflicted gunshot wound as the cause. Barnett had a tenure of over three decades with BA before retiring in 2017.

As a quality control engineer at the company, John Barnett expressed concerns about safety compromises in the production of 787 Dreamliner jets. In a 2019 interview with the BBC, he alleged that BA rushed production, resulting in emergency oxygen systems for Dreamliners with a failure rate of 25%.

Barnett indicated that a quarter of 787 Dreamliners were vulnerable to rapid oxygen loss during sudden cabin decompression, posing suffocation risks to passengers. He mentioned experiencing these issues upon joining BA’s North Charleston plant in 2010 and allegedly voiced his concerns to managers but observed no subsequent actions taken.

A statement provided to CNN by his lawyers says, “John was in the midst of a deposition in his whistleblower retaliation case, which finally was nearing the end. He was in very good spirits and really looking forward to putting this phase of his life behind him and moving on. We didn’t see any indication he would take his own life. No one can believe it. We are all devasted [sic]. We need more information about what happened to John.”

Implications for Airlines

BA’s rocky start in 2024 reverberates through its customer base, prompting airlines to reconsider flight schedules and hiring initiatives amid uncertainty surrounding the company’s delivery constraints.

Despite strong demand, Helane Becker, TD Cowen Senior Research Analyst, notes that BA’s manufacturing and delivery disruptions “limit growth” for airlines, compelling them to curtail workforce expansion, thereby impeding service offerings.

Companies will be forced to limit workforce expansion, which will hamper service offerings. “Without a robust airline industry, it’s very hard to have a robust economy,” Becker has warned.

Damage Control

BA is emphasizing quality management by introducing weekly compliance checks and additional equipment audits for all 737 work areas. These measures, outlined in a recent memo to employees, have commenced March 1 onward. Mechanics will also dedicate time during each shift to conduct compliance and foreign object debris sweeps.

“Our teams are working to simplify and streamline our processes and address the panel’s recommendations,” the memo said, noting that employees have to focus on looking out for safety hazards and follow manufacturing processes precisely. “We will not hesitate in stopping a production line or keeping an airplane in position.”

BA is further reinforcing quality standards by auditing all toolboxes and removing non-compliant tools. Stan Deal, Executive Vice President of BA, emphasized the importance of strict adherence to manufacturing procedures and processes designed to guarantee conformity to specifications and regulatory requirements.

Stan Deal also noted that BA, in collaboration with Spirit AeroSystems Holdings, Inc. (SPR), has instituted additional inspection points at their facility in Wichita. Consequently, beginning March 1, teams at the facility are ensuring first-pass quality before any fuselages are shipped to Renton.

Bleak Outlook

In the short term, BA’s outlook appears grim as a result of recent incidents and production challenges, likely leading to a decline in investor confidence and stock performance. While damage control initiatives may eventually improve the company's trajectory, uncertainties persist, making it prudent for investors to exercise caution at present.

The long-term prospects are contingent upon BA’s ability to restore trust among airlines, regulators, and passengers. However, each new incident and negative headline further complicates this task, potentially eroding the company's reputation and hindering future growth opportunities. Restoring confidence will be crucial for BA’s sustained success in the aviation industry.

Analysts expect BA’s revenue to rise by 10.8% year-over-year to $19.85 billion in the first quarter ending March 2024. However, the company is expected to report a loss per share of $0.14 for the ongoing quarter. Moreover, BA’s stock is exhibiting significant volatility, with a 60-month beta of 1.52. Over the past three months, BA shares have plummeted by more than 25%.

The company's profitability has also suffered a considerable blow, with its trailing-12-month gross profit margin at 11.89%, representing a 61.2% decline compared to the industry average of 30.62%. Similarly, its trailing-12-month EBITDA margin and trailing-12-month Capex/Sales stand at 4.05% and 1.96%, lower than the industry averages of 13.75% and 3.04%, respectively.

Bottom Line

The company’s turbulent beginning in 2024 extends beyond its stock performance, compounded by an already tarnished reputation. Rebuilding trust among airlines, regulators, and passengers will be increasingly challenging with each subsequent mishap and negative publicity.

These recent incidents, regulatory scrutiny, and ongoing legal battles have led to a decline in investor confidence and stock performance. While damage control efforts are underway, uncertainties persist. Therefore, it would be wise to avoid investing in BA shares now.