On Jan. 13, Boeing (NYSE:BA) board member David Calhoun took the helm as chief executive officer of the wounded aircraft manufacturer. Almost a year later, Boeing stock is down 31%.
Yet, it seems like Calhoun’s tenure’s been a success. In 2021, is Boeing stock ready to fly higher?
I’ll look at the reasons it could.
Boeing Stock Is Down But Not Out
Depending on how you look at things, Boeing’s performance in 2020 could be really impressive or disappointing. As a glass-half-full kind of person, the fact that it was trading as low as $89 in March, and is now over $215, is reason to be thankful if you’re a long-time shareholder.
However, others who aren’t so optimistic might suggest that it’s still down 50% from its all-time high of $446.01 in March 2019.
While there’s no question long-time shareholders have seen their annualized returns decimated over the past 20 months due to the grounding of the 737 Max – its five-year annualized total return is 11.9%, 330 basis points lower than the U.S. markets as a whole – I do believe things could have been much worse.
For starters, the 737 Max might never have gotten clearance from the Federal Aviation Administration to resume flights and deliveries. But it did.
“‘What I really want to see in 2021 is solid management of the [deliveries] of the Max,’ and ‘some level of stabilization with the 787,’” said Michel Merluzeau, an aerospace analyst with consultancy AIR.
According to FlightGlobal, approximately 450 737 Max’s have already been produced and are waiting for delivery. Boeing delivered its first of those in early December to United Airlines (NASDAQ:UAL). Now it’s got to convince other airlines to replace their older 737NGs with the new planes, further reducing its stockpile.
There’s no question that Calhoun and company have their hands full entering 2021. However, once other developed countries in Europe and elsewhere remove the grounding order, management will have a better idea of how fast it can reduce its stagnant inventory.
That said, Boeing’s already admitted that 2021 is reserved exclusively for getting through this crisis. It won’t be undertaking any new development projects.
A Right-Sized Business
Between the grounding of the 737 Max and the novel coronavirus, Boeing’s staffing levels got ahead of themselves. At the end of 2019, it had approximately 161,000 employees. At the end of 2014, it had 165,500 employees.
So, in 2014, each employee represented $548,640 in revenue, while in 2019, it was $475,776 per employee, 13.3% lower than five years earlier. Yet its operating expenses barely changed.
Therefore, it wasn’t surprising when Calhoun wrote in an October letter to Boeing employees that staffing cuts were necessary given the current environment.
“As we align to market realities, our business units and functions are carefully making staffing decisions to prioritize natural attrition and stability in order to limit the impact on our people and our company,” Calhoun wrote on Oct. 28.
“We anticipate a workforce of about 130,000 employees by the end of 2021. Throughout this process, we will communicate with you every step of the way.”
That’s a cut of almost 20% of its overall staffing levels.
In the first nine months of fiscal 2020, Boeing’s revenues were $42.9 billion, 27% lower than a year earlier. It had an operating loss of $4.7 billion on the bottom line, down from a profit of $229 million in the same period a year ago.
For the trailing 12 months ended September 2020, Boeing had revenues of $60.8 billion. Based on a 27% drop in revenue from 2019’s full-year sales of $76.6 billion, it would finish 202o with sales of $55.9 billion, almost identical to its current TTM sales.
If we assume it has flat sales growth in 2021, it would finish the coming year with a revenue per employee figure of 430,000, down 10% from 2019, but well ahead of what it would generate with 161,000 employees on the payroll.
As a glass-half-full person, I see 2021 as the year Boeing’s problems come to an end. In 2022, expect its growth to resume, albeit at lower than historical hiring patterns.
It’s Got to Get Free Cash Flow Positive
They say timing is everything.
In early February 2019, I wrote about the seven reasons you want Boeing stock in your portfolio. That was a little more than a month before the March 10, 2019, second crash of a 737 Max, which ultimately led to the plane’s grounding.
One of the reasons was it had enormous free cash flow.
“Assuming it hits the low-end of its outlook for operating cash flow in 2019 of $17 billion and allocates $2.3 billion to capital expenditures, free cash flow in 2019 should increase by 8% to $14.7 billion, bringing its FCF yield above 6%,” I wrote. “Not bad for a tired old airplane manufacturer.”
In the past 12 months, Boeing had free cash flow of -$18.2 billion, a 224% decline in this vital statistic. Were it to get back to that; you can be sure that it would test its all-time high.
The question, therefore, is when does it get back to these levels?
Not in 2021 is the simple answer. And if the demand for the widebody 787 continues to slow, it’s going to take 2-3 years to get back to positive free cash flow.
The Bottom Line
Boeing stock is currently trading at 2.1x sales. That’s higher than its five-year average of 1.7x sales. So, it’s definitely not cheap at the moment.
Faced with a bunch of challenges in 2021, Calhoun’s going to have to be a first-class cheerleader to get its stock up to $300 or higher. So far, he’s shown he’s up for the task.
If you plan to hold for three to five years, you might not get burned buying its stock under $230. However, because it’s not out of the woods just yet, I’d wait to see if you can buy it for less than $200 at some point in the first half of 2021.
In the meantime, there are lots of other stocks to chase that aren’t reeling from a double-whammy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
