Boeing Co. (BA, Financial) is soaring through turbulence, oscillating between the gravity of its disappointments and the lift of its potential.
Its ambitious financial targets are under threat, with 737 deliveries stalling and defense projects in jeopardy. Yet, against this cloudy backdrop, sunbeams of hope emerge through booming aviation markets in China and Vietnam.
The aerospace titan finds itself in a complex balancing act—grappling with geopolitical intricacies, an impressive yet languishing MAX series and Wall Street's cautiously optimistic stance.
The disappointing reality
In November 2022, Boeing set ambitious goals, aiming for free cash flow of $3 billion to $5 billion in 2023 and $10 billion between 2025 and 2026. The main drivers were supposed to be increased production of the 737 and overcoming supply chain difficulties in its Defense, Space & Security division.
However, the company has underperformed on both fronts. The latest update revealed 737 deliveries are likely to be at the lower end of the estimated range of 400 to 450 for 2023, due partly to manufacturing issues from fuselages supplied by Spirit AeroSystems (SPR, Financial). This is the second setback this year, making the full-year guidance increasingly unlikely.
On the defense side, the Defense, Space & Security business struggles with supply chain and labor issues. The segment also faces hurdles in de-risking fixed-price programs and improving profitability, with 25% of its legacy programs still underperforming.
August scorecard: Challenges in 737 MAX offset by robust wide-body deliveries
In August, Boeing's performance presented a mixed bag with some bright spots amidst the challenges. On one hand, the company faced production issues from its supplier, affecting the delivery of its 737 MAX airplanes, which is soft.
However, this was partially offset by a robust flow of wide-body deliveries, including five Boeing 767s—two of which were base aircraft for the KC-46A tanker—and three Boeing 767-300Fs for FedEx Express (FDX, Financial), as well as three Boeing 777Fs and four Boeing 787s.
Despite these issues, the overall August delivery numbers remained stable year over year at 35 airplanes. Interestingly, the value of these deliveries increased from $2.5 billion last year to $2.9 billion this year, suggesting a favorable delivery mix and higher volume.
Year to date, Boeing has shown signs of recovery, delivering 344 airplanes valued at $24.7 billion, a 24% increase in deliveries and a 36% increase in delivery value compared to the same period last year.
Silver linings: China and Vietnam deals
President Joe Biden recently welcomed a "landmark" $8 billion deal between Boeing and Vietnam Air for 50 MAX jets. This signals international faith in the company's technology and provides a much-needed shot in the arm for the beleaguered company.
Undoubtedly, China plays a vital role in Boeing's medium and long-term growth strategies. With rising air travel in China, the country will need more airplanes. Boeing’s Commercial Market Outlook predicts that China will need 8,560 new commercial airplanes through 2042.
Approving deliveries of the stored 737 MAXs earmarked for Chinese airlines could be the fastest way for Beijing to meet its growing travel demands. Recent reports suggest some Chinese airlines have already started using 737 MAXs stored on Chinese soil for commercial flights, pointing toward an impending normalization of Boeing-China relations.
Furthermore, China’s aspirations to manufacture its own commercial planes, such as the narrowbody C919, still rely heavily on American suppliers. A complete severing of ties with Boeing would be detrimental to China's aviation industry. Still, it could also lead to retaliatory measures from the U.S., potentially impacting China's homegrown aviation aspirations.
The situation can be described as a balancing act for Boeing. On one hand, the China market offers an enormous opportunity, not just in terms of new orders, but also as an essential part of the supply chain for Chinese commercial aviation projects. On the other hand, geopolitical tensions and the historical 737 MAX issues provide a layer of complexity and risk.
The MAX factor
It is essential to remember the broader context: Boeing has almost 5,000 undelivered planes in its backlog, equivalent to years of demand.
While the MAX jet faced worldwide grounding between May 2019 and November 2022 due to two deadly crashes, it has been back in service without significant incidents. Although lagging behind Airbus' (XPAR:AIR, Financial) competing A220 and NEO series, Boeing's MAX retains substantial market interest, with over 7,000 orders.
Conclusion
Boeing is at a crossroads. While it faces significant challenges in meeting its short-term objectives, long-term prospects offer hope, particularly in emerging markets like China and Vietnam. For investors, the Boeing paradox presents a high-risk, high-reward scenario that demands scrutiny and, perhaps, a measure of cautious optimism.
Therefore, the stock remains attractive based on its 2025-26 targets and the sheer size of its backlog. However, investors must prepare for more bad news in the short term while keeping an eye on third-quarter earnings for updated guidance.
