Boeing CFO Brian West spoke about quality manufacturing practices, company supplier Spirit AeroSystems, and cash flow with investors at a BofA Securities conference Wednesday morning.
It wasn’t clear that investors liked what they heard. Boeing shares dipped initially but then recovered as investors considered what comments meant for cash flow in 2024 and in the coming years.
While Boeing stock was down about 2% in premarket trading, it rebounded early and shares closed at $187.78, up 3.7%. The S&P 500 and Nasdaq Composite rose 0.9% and 1.3%, respectively, boosted by Federal Reserve documents that show the central bank still plans to cut interest rates sometime in 2024.
BofA analyst Ron Epstein led the discussion, asking questions on the minds of all investors — particularly about production quality — in the aftermath of the Jan. 5 emergency door plug blowout on a 737 MAX 9 jet operated by Alaska Air. Missing bolts were blamed in a preliminary accident report.
Spirit AeroSystems made the fuselage, which required some rework at the Boeing plant.
“Now, we will only accept a fully conforming fuselage from Spirit,” said West. “There might be some variability of supply.”
That’s a quality improvement. How often Boeing would receive a nonconforming fuselage isn’t known. Boeing didn’t provide that detail when asked.
Boeing is also prioritizing finishing assembly work on schedule versus the flow in the factory.
“Traveled work has existed for a very long time,” added West. Traveled work refers to doing a task at a different spot in the assembly line than originally intended. “Once you…reduce traveled work…your quality gets better, your stability gets better.”
West also made it sound as if Boeing and Spirit Aero merger talks are moving ahead. Boeing sold Spirit to private equity in 2005, but earlier this month, the two companies confirmed they were in discussions about Boeing acquiring its fuselage provider.
Boeing “probably got a little too far ahead of itself on the topic of outsourcing,” West said. “We believe and Spirit believes, that reintegrating these two companies is what’s best for safety and for quality.”
Spirit Aero stock is up about $4 a share to almost $33 a share since Boeing and Spirit Aero began talks earlier this month. Shares closed at $35.11, up 6.5% on Wednesday.
Benchmark analyst Josh Sullivan says a deal is looking more likely. “By bringing Spirit in-house [Boeing] can make a major change” that shows customers and regulators it’s working to address recent shortcomings.
Of course, all of these changes to improve production quality have a cost.
“As we have decided to hold airplanes in position longer and get after this traveled work…it is going to impact revenue, earnings, and cash flow both in the quarter and the year,” West said.
Boeing will use $4 billion to $4.5 billion in the first quarter. For the full year, free cash flow should be in the “low single-digit” billions.
That’s worse than Wall Street expects. For the first quarter, Wall Street was projecting a cash use of $1.5 billion. For the full year, Wall Street was predicting positive free cash flow of $5 billion — a number in the mid-single-digit billions.
“Cash slash,” is how Vertical Research Partners analyst Rob Stallard characterized West’s comments in a Wednesday report.
“The first step towards fixing a problem is acknowledging that it exists, ” added Stallard. “Boeing’s cut to its free cash flow guidance is an overdue recognition of the situation it is in, but we still worry that it is being overly optimistic. It has no guarantee [about] what the FAA’s conclusion will be on the 737, and it is currently producing way below the official rate of 38 per month.”
Stallard rates Boeing stock Hold and has a $230 price target for shares. Sullivan rates shares Buy. His price target is $250 a share. Overall, 69% of analysts covering the stock rate shares Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. The average analyst price target for Boeing stock is about $261 a share.
Analysts’ stock price targets might come under pressure as Wall Street digests West’s cash comments.
Lower targets, and lower cash flows, could pressure shares, but Boeing stock is already badly beaten up. So far this year, shares have dropped 28%.
Write to Al Root at allen.root@dowjones.com