Boeing (NYSE:BA) did not deliver as many airplanes in the fourth quarter as analysts may have expected from its Q3 earnings reports. As a result, BA stock may take a hit once the Q4 earnings come out on Jan. 27.
When Boeing announced its Q4 deliveries on Jan. 12, investors saw that only four Dreamliners (787) passenger jets were delivered during the period, out of a total of 59 commercial planes delivered.
This brought the 2020 total delivered to 157 commercial airplanes, of which, 43 were from its 737 model line, including 31 that came out of production in December.
However, the company did not delineate how many of the 737’s delivered were 737 MAX airplanes. Presumably, most of these were MAX jets, but the company will need to confirm this in its earnings call.
Boeing said that “the resumption of 737 MAX deliveries in December was a key milestone as we strengthen safety and quality across our enterprise.” Reuters indicated that there were 27 737 MAX planes delivered during December. That represents 63% of the total 43 737 planes delivered during Q4.
Moreover, Reuters pointed out that for the second month in a row, Boeing had not delivered any 787 Dreamliners. The four delivered in Q4 came in October. Since then the company has had intensive inspections over recent production flaws in the Dreamliner. This is on top of the problems of cut orders for its 737 Max planes.
It’s All About Cash Flow
The pace of deliveries is important for the company’s cash flow. Analysts will scrutinize these deliveries in order to estimate how much cash the company is burning and when or if the company will turn cash-flow positive.
For example, Boeing lost over $5 billion in negative free cash flow during Q3, according to data compiled by Seeking Alpha. This can be seen in the line called “Cash from Operations”, which shows negative $4.82 billion, as well as the next line, “Capital Expenditure”, which was negative $262 million.
The total of these two lines for the quarter was negative $5.081 billion. That amounts to negative free cash flow.
Moreover, the data also shows that there have been six consecutive quarters where Boeing has had negative free cash flow (FCF).
Analysts want to see that turn into positive FCF, once the company starts to deliver more commercial airplanes. The last time that Boeing produced positive FCF was in March 2019
During that quarter it made $2.79 billion in cash from operations (CFO) and spent $501 million on capex. Therefore, its FCF was $2.29 billion (i.e., $2.79 billion minus $501 million).
Moreover, revenue during that quarter was $15.75 billion. Therefore, its FCF margin was 14.5%. We can use that to estimate FCF going forward. For example, assuming its commercial airplanes get back on track by Q1 2021, the company might produce at least $15.36 billion in revenue.
Therefore its normalized FCF should be 14.5% of that amount, or $2.23 billion. That is a tracking trend line that analysts will be looking for the company to hit over the next several quarters.
It will mean that the company will hit a run rate FCF of $8.9 billion, hopefully by the end of this year.
What To Do With BA Stock
Assuming Boeing makes $8.9 billion in run-rate FCF by the end of this year, its FCF yield is now very attractive to BA stock investors. This is because if we divide $8.9 billion by its market capitalization of $116.2 billion, we get a FCF yield of 7.6%.
I believe that once the market believes the company will reach FCF status, it will push Boeing stock much higher. For example, at a 4.0% FCF yield, the market cap will hit $222.5 billion (i.e., $8.9 billion divided by 4.0% equals $222.5 billion). This is 91.5% higher than today
This means that BA stock could hit a price equal to $387 per share. But remember, that is only if the market believes Boeing will be on a run-rate FCF of $8.9 billion. And it may take until the end of this year before that happens. It could even longer.
In the meantime, the market is going to watch the company’s deliveries and the effect those have on its quarterly free cash flow. I recommend investors wait until Jan. 27 to see what happens with its FCF for Q4.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.