Down slightly more than 22% so far in 2024, it's been another disappointing year for Boeing(NYSE: BA). Still, no one is looking at buying Boeing for the company it is now. But there's a robust case for buying the stock based on the potential for its highly regarded new CEO, Kelly Ortberg, to turn the company around. Let's take a look at the bear and bull cases.
The bears' case
There's no shortage of things to worry about with Boeing right now. Its core Boeing commercial airplanes (BCA) segment has suffered ongoing quality management issues with the 737 MAX. The problems, including a high-profile door blowout on an Alaska Air flight earlier in the year, caused the company to slow down deliveries to improve safety and quality.
In addition, the recent and embarrassing news that Boeing had grounded its 777X test fleet after a failure only weeks after beginning Federal Aviation Administration (FAA) certification flight testing will surely test investors' patience.
As part of its efforts to improve quality control and ensure an adequate supply of fuselages, Boeing is buying Spirit AeroSystems and may well have to put more cash to work in Spirit to improve its operations.
Furthermore, the bears also point out that Boeing's challenges aren't limited to commercial aerospace. The other major segment, Boeing defense, space & security (BDS), continues to report whopping losses, primarily due to problematic fixed-price development programs, including the Air Force One deal that President Trump famously inked with Boeing during his presidency.
If the bears are right and this turns out to be a structural issue in the defense industry -- Lockheed Martin and RTX are just two defense companies struggling with fixed-price contracts -- investors may have to lower BDS's long-term earnings estimations.
Image source: Getty Images.
If all that wasn't bad enough, Boeing's management is negotiating a new contract with the International Association of Machinists (IAM) to replace one that will expire in mid-September.
Finally, Boeing's former CEO, Dave Calhoun, has left Ortberg in charge of an operation that looks confused about where it's going. For example, Calhoun never abandoned the $10 billion free cash flow (FCF) goal in the 2025/2026 target outlined in November 2022. Calhoun may have continued to believe in the target, but there were few takers on Wall Street, given that the analyst consensus for FCF is $4.8 billion in 2025 and $8.1 billion in 2026.
The bulls' case
The best argument behind Boeing stock is a pragmatic one that accepts the company's faults and highlights the attractive valuation and the potential for improvement under industry veteran Ortberg.
Boeing's new CEO has an impressive track record of managing highly complex operations. As CEO of Rockwell Collins, he acquired seats and cabin interior products company BE Aerospace. He later served as CEO of Collins Aerospace (a company created out of the acquisition of Rockwell Collins by United Technologies). He led the company into its integration with Raytheon Company as part of the merger of the former and United Technologies' aerospace and defense business.
Image source: Getty Images.
The bulls will argue that the bar has been set so low that Ortberg has plenty of opportunity to generate significant shareholder value. Going back to the FCF forecasts above, no one really believes in the $10 billion in 2025/2026, but they don't have to accept it to make Boeing a good value. For example, the Wall Street consensus of $8.1 billion in 2026 would put Boeing on a price-to-FCF multiple of just over 13 based on the current valuation.
Meanwhile, Boeing's deliveries are improving. Focusing on its all-important narrowbody 737 MAX, Boeing had 158 orders on the 737 MAX for the year to the end of July. The company continues to win orders and currently has 4,741 unfilled 737 MAX orders in its backlog.
Data source: Boeing presentations.
Meanwhile, at BDS, management argues that the problematic fixed-price development programs are passing through key milestones in 2024 and only represent 15% of its revenue -- the rest of BDS is profitable.
A stock to buy?
There is a value case for buying Boeing stock. Still, most investors can afford to be a little patient and wait for Ortberg to resolve the contract negotiations successfully, probably cut the $10 billion FCF in 2025/2026 target early on, and confirm BCA is on track to hit a delivery rate of 38 a month on the 737 MAX program. A quarter or two without multimillion-dollar BDS charges would also help.
It will be easier to get behind the stock once at least a few of these things happen, and Ortberg resets investor expectations.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Alaska Air Group, Lockheed Martin, and RTX. The Motley Fool has a disclosure policy.
