Where will Boeing be in three years?

Mid-term outlook is important boeing (B.A. -0.70%) Because no one is buying what stocks are now, but rather what they will become. Management has long-established medium-term guidance, and investors will inevitably factor this into their valuations and monitor key milestones to achieve this. Here’s a look at what this is and some thoughts on what it means for your investment proposition.

Boeing’s Mid-Term Outlook

Management presented its 2025/2026 targets in its November 2022 Investor Day presentation. Key parts of the plan include a multi-year increase in aircraft production, particularly the 737 narrowbody, and a significant increase in Boeing Defense, Space and Security (BDS). ) Profit margins lead to segment operating cash flow of $12 billion. Boeing expects free cash flow (FCF) of $10 billion in 2025/2026 after completing $2 billion in capital expenditures.

In relation to these goals and where we are now, three things stand out.

• Boeing is falling behind on milestones.
• When it comes to meeting guidelines, it’s not just about when but also when.
• This goal is also very relevant to Boeing’s long-term future.

Boeing’s Milestone

Unfortunately, Boeing’s progress toward its goal is not as smooth as hoped. Boeing, which had set expectations for 400 to 450 Boeing 737 deliveries in 2023 and achieved a production rate of 50 per month in 2025/2026, failed to immediately meet its 2023 Boeing 737 delivery target by delivering only 396 units. Rather disappointingly, the main problem is not about supply chain difficulties and availability of components. Instead, manufacturing quality issues have continued to hit Boeing. Alaska Airlines Avoid modern thinking.

Accordingly, management decided to postpone its 2024 guidance for its most recent earnings release. This is not a good sign as investors are looking for a bridge to Boeing’s medium-term guidance.

Another less frequently discussed issue is that BDS continues to report losses. Boeing is not the only company in the defense sector experiencing margin pressure. RTX and lockheed martin I feel it too. Particular pressure appears to be placed on the defense industry’s fixed-price development programs achieved in times of less inflation. Last October, Boeing CFO Brian West predicted that BDS would help Boeing reach its $10 billion FCF target, but “probably not much more” than originally expected.

Commenting on the latest earnings call, West said he remained “confident” about the 2025/2026 target, but that “it may take longer than originally anticipated and we will not rush the system.”

Image source: Getty Images.

It’s not a question of if, but when.

Moving forward on schedule for the $10 billion goal may not seem like a big deal, but it would actually make a significant difference in the way investors think about stocks. To look at the matter simply, it is reasonable to expect a mature industrial company to trade at 20 times FCF. Applying a 20x FCF multiple to Boeing and assuming it achieves its $10 billion target, the target market capitalization would be $200 billion, or $327 per share at current prices.

This figure represents a 56% premium to the current price. Assuming, for the sake of argument, that $10 billion is reached in early 2025, that would mean an equity return of about 56%. Now let’s assume it hits at the end of 2025. This means a 25% annual return. Finally, assuming the $10 billion target is reached by the end of 2026, the annualized return is 16%.

As you can see from this example, timing makes a big difference in your investment proposition. For reference, Wall Street analysts expect Boeing to reach its $10 billion target in 2026, as FCF is expected to be $8.8 billion in 2025 and $10.8 billion in 2026.

Image source: Getty Images.

think long term

The Boeing 737 first flew in 1967 and has been updated several times (the 737 MAX is the latest generation), but Boeing hasn’t completely redesigned its narrow body for decades. Developing a new airplane takes time and, above all, billions of dollars in cash. Boeing CEO David Calhoun has made it clear that there will be no new Boeing aircraft before 2035.

However, Boeing requires upfront investment, and Boeing has $52.3 billion in consolidated debt. Simply put, Boeing needs at least $10 billion in FCF soon to service its debt and fund future investments.

Boeing in a few years

In a few years, the company will likely be in a better position than it is now. Nonetheless, nuances in the timing of FCF generation have significant implications for investment propositions and their long-term future. While the stock is attractive, there are many other aerospace stocks that are performing better operationally. Right now, Boeing needs a few solid quarters of execution to dispel any doubts.