American aerospace giant Boeing (BA) reported Q1 2022 earnings that missed expectations last week, further adding to its stock’s decline, which has been on a downtrend since mid-2021 peaks. According to a recent Bank of America (BAC) Global Research report, there are 13 key headwinds that Boeing’s management is not fully recognizing.
“Boeing has made a reputation of acknowledging and adjusting to challenges well after they have become clear to everyone else,” the report reads. “Investors are now wondering what challenges are not factored in Boeing’s outlook and could still appear.”
In light of these looming challenges, BofA is maintaining its Neutral rating on Boeing’s stock with a price target of $180 — down from its previous target of $220.
Boeing’s challenges
1. $7.9 billion in defense charges so far; not the end yet
Boeing’s defense business has racked up $7.9 billion in losses thus far. And although the company has recent wins in securing contracts for aircraft like the KC-46, VC-25B, T-7A, and MQ25, supply chain issues, an inflationary environment, and a tight labor market may continue to put pressure on costs and defense programs.
2. 787 — a long road to fix and sustain
Deliveries for the 787 have been interrupted since May 2021, according to BofA. Overall, Boeing’s commercial airplane sales declined 3% in Q1. The aerospace manufacturer continues producing at a “very low rate,” and it has already accumulated around $12.5 billion in aircraft inventory.
3. 737 MAX 10 entry into service in 2023 at high risk
The 737 MAX-7 and 737 MAX-10 are currently undergoing the FAA certification process. However, the MAX 10 may encounter significant delays with regard to its entry into service (EIS) and incur additional costs to Boeing if it is not certified before the end of the year as regulations prohibit the FAA from issuing a type certificate after Dec. 27, 2022, unless flight crew alerting system meets certain requirements.
4. Weakened cash profitability of remarketed aircraft
BofA remains concerned about the impact to cash margins from 737 MAX and 787 remarketing activities. The report attributed weakening profitability to lower production rates, an unfavorable model/customer mix, and remarketed pricing.
5. 777X — $8 billion of early production not to be recovered
Boeing has delayed the entry into service of its 777X-9 — touted as the “world’s largest and most efficient twin-engine jet” — to 2025 from a previous timeline from late 2023. Production of the 777X-9 will therefore be paused in 2022 and 2023, resulting in $1.5 billion of abnormal costs, BofA estimates. This adds to the 4Q 2020 reach forward loss on the 777X of $6.5 billion to amount to $8 billion in total investments on the aircraft that are not expected to be recovered through deliveries.
6. Engineering shortage affecting current programs ramp up
BofA notes that Boeing has lost a significant number of engineers — especially among senior levels — throughout the pandemic and MAX production interruption. Amid tight labor market conditions and the “Great Reshuffle,” engineering talent is trickling out of Boeing and into space and next-gen aero technology.
7. Increasing U.S.-China trade & military tensions
With China representing about a fourth of total demand for commercial aircraft, BofA believes that increasing economic and military tensions between Washington and Beijing could spur China to choose Airbus (AIR.PA) over Boeing for political reasons.
8. Boeing faces headwinds, while Airbus faces tailwinds
Over the next five years, Boeing faces headwinds in overcoming market share loss in the large narrowbody aircraft market and managing production problems on the 787 and 777X. BofA thinks Airbus is “in the catbird seat” and can react appropriately to Boeing’s actions. In the medium term, Airbus also stands to benefit from growing EU defense budgets as a result of the Russia-Ukraine war.
9. New narrowbody jet: financing, engineering, R&D constraints
BofA believes Boeing should develop a new narrowbody jet model with greater capabilities, as Airbus’s A321 and A220 lines of aircraft are “chipping away” at Boeing’s market share in the narrow-body segment. While the report estimates that such a program may take seven to eight years and at least a $15 billion investment, concerns of lack of engineering strength and low R&D spending serve as major roadblocks to new product development.
10. Unclear strategy around services
Boeing had anticipated its Boeing Global Services (BGS) to become a $50 billion services business within a decade from 2016. However, BofA believes this goal is no longer feasible post-COVID, with BGS generating just $18.5 billion in revenues in 2019.
“Management has not commented on the matter since the pandemic began and it has become apparent that Boeing is looking to de-emphasize and step away from the former objective,” the report reads.
11. Lack of regular dividend can push away some investors
BofA does not see Boeing restarting its regular dividend payments until they reach more conservative leverage levels. This poses a threat to Boeing’s stock and may drive potential investors away towards other “shareholder friendly” names in aerospace and defense like Raytheon (RTX).
12. Continued challenges to profit could impact credit rating
Boeing had $14.7 billion in revolving credit agreements at the end of 1Q 2022, but BofA sees the possibility of sustained operational challenges across its business sectors hurting EBITDA generation, leading to credit rating downgrades.
13. Risks to consensus cash estimates
BofA maintains a forecast of $8.5 billion to $8.8 billion in free cash flows (FCF) annual generation for 2024 to 2026, reflecting a slowdown from $11.7 billion for 2023. This slowdown is mainly attributed to the ending of 737 MAX inventory burndown cash inflows.
Thomas Hum is a writer at Yahoo Finance. Follow him on Twitter @thomashumTV
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