Morgan Stanley's Kristine Liwag breaks down Boeing's Q3 results

Key Concepts

• Boeing 777X Program: A significant program for Boeing, facing delays and financial charges.
• Free Cash Flow (FCF): Cash generated by a company after accounting for capital expenditures. Positive FCF is a sign of financial health.
• FAA Certification Process: The regulatory process by which the Federal Aviation Administration approves aircraft for commercial use.
• Backlog: The total value of orders for future deliveries.
• Production Rate Increases: The planned acceleration of aircraft manufacturing.
• Equity Analyst: A financial professional who analyzes stocks and provides investment recommendations.

Boeing Earnings and 777X Program Impact

Boeing reported earnings that showed a mixed picture. While the company achieved positive free cash flow for the first time in Q1 2023 and saw a 30% increase in revenue, a significant $5 billion charge related to the 777X program is causing concern. This charge, exceeding investor expectations of $4 billion, stems from delays in delivering the first 777X aircraft. Although the charge is non-cash in the current quarter, it is anticipated to have a multi-year impact on Boeing's cash generation capabilities, contributing to negative sentiment in the stock.

777X Program Delays and FAA Certification

The delays in the 777X program are a major point of concern. The aircraft was initially expected to enter service in 2020, and the current delays are part of broader program issues at Boeing. The company has expressed disappointment with the extended FAA certification process, which is taking longer than anticipated. This situation is characterized as a "mix of everything," potentially influenced by FAA concerns about the program and, to some extent, by the government shutdown. The focus on resolving issues with the 737 Max and 787 in previous years may have led to the 777X program being a lower priority.

Stock Performance and Investment Recommendation

Boeing's stock has performed well year-to-date, up by 44%, following years of investor concerns. However, Christine Lag, Morgan Stanley's senior aerospace and defense equity analyst, maintains a "neutral" (equal weight) rating on Boeing. This recommendation is based on a balanced risk-reward profile, where improvements in the 737 Max and 787 programs are offset by the significant problems with the 777X. Lag's price target of $235 already factors in 25 times the projected 2027 free cash flow.

Alternative Investment Opportunities

Lag suggests that investors looking to benefit from increased production rates of the 737 Max and 787, without the complications of the 777X program, should consider companies that supply Boeing. Specifically, she highlights Helmet (ticker HWM) and RTX as attractive alternatives.

Key Arguments and Supporting Evidence

• Argument: Boeing's earnings report is mixed, with positive operational improvements overshadowed by the 777X program's financial impact.
  • Evidence: Positive free cash flow for the first time in Q1 2023, 30% revenue increase, record deliveries (160 airplanes quarterly since 2018), and a backlog increase of nearly $100 billion versus December 2024.
  • Counter-evidence: A $5 billion charge on the 777X program, exceeding the expected $4 billion, and concerns about its multi-year cash generation impact.
• Argument: The 777X program delays are a significant hurdle with a long-term financial implication.
  • Evidence: The program is facing delays beyond its initial 2020 service entry, and the $5 billion charge is expected to affect cash flow for multiple years.
• Argument: The FAA certification process for the 777X is complex and prolonged.
  • Evidence: Boeing has expressed disappointment with the extended timeline, and the situation is described as a "mix of everything," including potential FAA concerns and past program priorities.
• Argument: The risk-reward for Boeing stock is currently balanced, making suppliers a more attractive investment.
  • Evidence: Lag's "neutral" rating and price target of $235, which already incorporates future cash flow projections. Her recommendation of Helmet and RTX as beneficiaries of increased production rates without 777X issues.

Data and Statistics Mentioned

• Boeing Stock Performance: Up 44% year-to-date.
• 777X Program Charge: $5 billion (exceeding investor expectations of $4 billion).
• Boeing Revenue Increase: 30%.
• Boeing Quarterly Deliveries: 160 airplanes (record since 2018).
• Boeing Commercial Airplanes Backlog: Up nearly $100 billion versus December 2024.
• 777X Initial Expected Entry into Service: 2020.
• Lag's Price Target for Boeing: $235.
• Lag's Valuation Basis: 25 times 2027 free cash flow.

Conclusion

Boeing's recent earnings report highlights a company making strides in operational efficiency, evidenced by positive free cash flow and increased deliveries. However, the substantial $5 billion charge and ongoing delays associated with the 777X program cast a shadow, posing a multi-year challenge to cash generation. While the stock has seen a significant rebound, the analyst's neutral stance reflects a balanced risk-reward. For investors seeking exposure to the aerospace sector's growth, suppliers like Helmet and RTX are presented as potentially more favorable options, as they stand to benefit from increased production rates of other Boeing aircraft without the specific headwinds of the 777X program.