Boeing's Exceptional Start to 2023 Waves a Green Flag at Investors
By Lee Samaha – Jan 20, 2023 at 5:21PM
KEY POINTS
Boeing's 787 and 737 production was better than expected in the fourth quarter.
If this trend can continue, and supply chain constraints ease through 2023, then the stock has upside potential.
Increased airplane production is vital to Boeing's ability to grow its profit margin.
The aerospace giant's latest delivery report shows near-term progress in ramping up airplane production.
Aerospace giant Boeing ( BA) has had its fair share of bad news over the last few years, but its latest deliveries report can't be construed in any other way but positively. It's the kind of news flow that can change the narrative around the stock and lead to significant rerating by a skeptical market. Here's what happened and why it matters.
Boeing's fourth-quarter delivery report
I'll get to the numbers quickly, but it's important to note why a delivery ramp is crucial for the stock. It's not just a question of booking more revenue per se. The fact is that ramping production is a critical factor in generating margin expansion. In other words, more of the revenue turns into profit. This is because Boeing can reduce its unit cost of production as it delivers more planes. A production ramp is also critically important because it demonstrates that the company and its suppliers are slowly overcoming the supply chain issues that caused production shortfalls in 2022.
To illustrate this fact and the details of the fourth quarter, I've collated a table of quarterly deliveries (for its key programs) through 2022. In addition, I've included the assumptions management made for 2023 and 2025/2026 to meet its target of $10 billion in free cash flow (FCF) in the 2025/2026 time frame. As a reminder, Boeing wasn't approved to deliver its wide-body 787s by the Federal Aviation Administration in the first half of 2022.
COMMERCIAL AIRPLANES PROGRAM DELIVERIES 2022 (UNITS)
FIRST QUARTER
SECOND QUARTER
THIRD QUARTER
FOURTH QUARTER
KEY ASSUMPTIONS FOR 2023 GIVEN AT INVESTOR DAY (YEARLY UNITS)
KEY ASSUMPTIONS FOR 2025/2026 GIVEN AT INVESTOR DAY (YEARLY UNITS)
|
Boeing 737
| 86
| 103
| 88
| 110
| 400-450
| 600
| Boeing 787
| 0
| 0
| 9
| 22
| 70-80
| 120
|
DATA SOURCE: BOEING PRESENTATIONS.
Fourth-quarter delivery performance vs. guidance
The numbers are generally ahead of the commentary on the third-quarter earnings call at the end of October. CFO Brian West said regarding the 787 program, "We continue to produce at low rate and will gradually return to five airplanes per month over time. Near term, the supply chain remains a key watch item for 787 production and deliveries." As you can see above, the fourth-quarter monthly rate is more than seven, and the combined total for the last six months (31 units) averages more than five a month. Boeing is undoubtedly playing catch-up on the 787 (following the production halt earlier in the year), making it easier to deliver 787s in the near term. Still, it's good to see 787 production ramp to a rate Boeing wants to maintain in 2023.
Turning to the all-important 737 program in October, West said:
We continue to work toward stabilizing deliveries. However, given our deliveries to date, we now estimate about 375 737 airplanes this year. The monthly delivery trend is expected to remain in the low-30s into next year.
Ultimately, the production surge in the fourth quarter led to 387 of its 737 airplanes in 2022. As a result, Boeing ended the year with a 737 monthly production (calculated across the quarter) rate of 36.7 -- clearly ahead of West's commentary.
Boeing's stock in 2023
It's a good update and gives investors confidence that Boeing can ramp production through 2023. That's the key to hitting its target of $10 billion in FCF in 2025/2026. The good news suggests that Boeing's management is starting to underpromise and overdeliver. It could continue to do so if its supply chain (and that of its suppliers) eases more than expected in 2023. If Boeing can ramp production in line with the run rates achieved in the fourth quarter and work through its fixed price contracts in defense without too many hiccups, the stock could have a great year. |
