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How will things look for Boeing (BA 0.84%) in three years? Company management gave some insight on this question at its investor conference in early November. Taking that information at face value, the financial forecasting makes the stock look highly desirable. However, investing is rarely that simple, and Boeing has suffered a series of operational mishaps, bad luck, and poor decisions in recent years. So let’s look deeper at where Boeing could be in a few years.
Management has decided to make free cash flow (FCF) its crucial metric to follow and be judged on. FCF is what’s left over from net income after working capital requirements and capital expenditures have been taken out. It’s the flow of cash in a year that can be used to make returns to investors (through dividends and share buybacks), fund acquisitions, or, as in Boeing’s case, pay down debt.
FCF should be a crucial focus for Boeing investors because it’s gone south in recent years. At the same time, Boeing’s debt has ballooned, as it’s had to deal with the grounding of the 737 MAX, travel restrictions rocking the airline industry, and a series of cost overruns on defense contracts. 
Data by YCharts
The excellent news is that Boeing’s FCF target for 2025 through 2026 makes the stock look great. Management is looking for operating cash flow of $12 billion, and after $2 billion in capital expenditures is taken out, the target is for FCF of $10 billion in 2025 through 2026.
To put that figure into context, Boeing’s market cap is only $114 billion, implying Boeing will generate around 8.8% of that market cap in FCF in 2025–2026. That’s an excellent valuation because it means Boeing could pay an 8.8% dividend yield and still grow its business. However, Boeing’s priority will be to maintain its debt rating by paying down debt as well as investing in the business.
Everyone loves it when a plan comes together, but Boeing has plenty of work to do before its plan comes to fruition. The segmental details are shown in the table below. Boeing plans to reach segmental operating cash flow of $14 billion in 2025–2026. After that, there will be a “drag” of $2 billion in cash taxes, meaning an operating cash flow of $12 billion, and then the $2 billion in capital expenditures (as noted above) leading to the FCF of $10 billion.
Segment
Operating Cash Flow
2023 Estimate
Operating Cash Flow
2025–2026 Estimate
Boeing Commercial Airplanes (BCA)
$2.5 billion to $3.5 billion
$9 billion
Boeing Defense, Space & Security (BDS)
($1 billion) to ($0.5 billion)
$2 billion
Boeing Global Services (BGS)
$2.5 billion to $3 billion
$3 billion
Data source: Boeing.
One uncertainty in these projections is BCA’s ability to ramp up production of 737 and 787 aircraft. There’s no issue with backlog — where the company has 3,510 Boeing 737 airplanes and 413 Boeing 787 airplanes — and the commercial aerospace industry is recovering. However, Boeing will have to ramp up 737 production from around 31 a month in 2022 to 33–37 in 2023 to meet its target of 400–450 Boeing 737s in 2023. Beyond that, Boeing needs to produce 50 a month in order to hit BCA’s cash flow target.
This is a thing to watch because of supply chain constraints. Notably, the ability of CFM International (a joint venture with General Electric) to supply sufficient engines in the face of severe supply chain challenges is a question mark. In addition, ramping up aircraft production isn’t easy, particularly after such a challenging period.
The second uncertainty is BDS’s ability to work through fixed-price programs that have caused multibillion-dollar cost overruns and damaged the company’s reputation. Management argues that the key programs — the KC-46 tanker, the MQ-25 unmanned aircraft, and VC-25B, or Air Force One — will be largely derisked by 2025. That’s good to hear, but investors will have to wait a few years to see if Boeing can overcome its recent poor track record for execution.
It’s likely that Boeing will be in better shape in a few years. While a recession would hurt the company (notably its BGS segment), there’s enough backlog at BCA to cope with a moderate number of cancellations. Ultimately, it essentially boils down to internal execution at BCA and BDS. That’s something investors will be watching closely.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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