Imagine a game show host whips out a card sometime in the near future and reads:
“This pioneering manufacturing company is a conglomerate that’s mostly a commercial aerospace company that had been beaten down by missteps and burdened by debt. It required a talented executive to turn around manufacturing operations and unlock tremendous value for its shareholders. Name this company.”
A contestant could be forgiven for guessing Boeing Co., but the correct answer would be General Electric Co., and the talented executive is Larry Culp. The description certainly lines up with Boeing’s current circumstance. The only catch is that Boeing would have to pull off its turnaround and unlock all the value underpinned by its $428 billion backlog of orders for more than 5,400 aircraft. Even then, investors might be waiting for years for a big payoff.
The turnaround part is a real possibility, especially after Boeing raised about $21 billion in a sale of new shares, a vote of confidence from investors that new Chief Executive Officer Kelly Ortberg can revamp the company’s manufacturing culture and build high-quality planes. More than half of the 30 analysts with active coverage of Boeing whom Bloomberg tracks are counting on that outcome to underpin their recommendations of “buy” or the equivalent.
The bullish case for Boeing is less tangled than what Culp faced at GE, which was in a state of confusion after the financial arm that had fueled its success under Jack Welch unraveled during the 2008 banking crisis. GE was mired in hidden liabilities, bad acquisitions, product failures and a huge debt burden.
Culp’s success at GE creates a bit of a fear of missing out on Boeing. Those investors who bought early into GE’s turnaround had confidence because of large aircraft orders that would drive demand for jet engines for decades. That bet paid off. That same trend of aircraft demand is the main pillar for a Boeing rebound.
David Strauss, an equity analyst with Barclays, articulated the bullish argument well in a Jan. 6 report titled “Darkest Before Dawn.”
“We think upside for the stock now mostly relies on sustained positive momentum for production and deliveries, which we believe BA is poised to demonstrate in 2025,” Strauss wrote. The share sale, which was oversubscribed, relieved the immediate financial pressure while the company works toward positive cash flow, which could occur as soon as this year, he said.
A devastating 53-day machinists strike was even a “blessing in disguise,” Strauss said, because it created a pause that gives Ortberg an unprecedented opportunity to reset the manufacturing culture.
Before the bulls charge into Boeing, though, they need to keep a few things in mind. GE Aerospace’s share price didn’t really take flight until four years into Culp’s turnaround effort. Ortberg, who was hired in August, is just getting started.
Boeing also doesn’t have as much upside because it didn’t experience a long, large decline like GE, whose shares dropped to as low as $27 in 2020 from $287 two decades earlier. In fact, a 20-year chart of Boeing’s shares shows a steady upward movement interrupted by cycles, including the 2008 financial crisis. Then there is a three-year spike in the shares that began in 2017 and ended abruptly at the beginning of 2020.
Even after Boeing’s terrible year that drove down its shares by 32% in 2024, that stock remains above the levels at which it traded before 2017. In other words, that massive backlog of aircraft orders kept the stock from plunging like GE’s.
“It’s more of an art right now to try to put a valuation on Boeing because the company has no cash flow and has a lot of potential and so forth, but it all seems to be locked up right now,” said Jeff Windau, an analyst with Edward D. Jones & Co., who has a hold recommendation on the stock.
Let’s look at the driver of that three-year bubble in which Boeing’s shares soared as high as $440 in early 2019, even after the first fatal crash of the 737 Max and right before the second accident. Investors were riding a sugar high of dividends and share buybacks of almost $13 billion in both 2017 and 2018. The company kept up this torrid pace of shareholder returns in early 2019 before the bottom fell out. With the clarity of hindsight, the maniacal push to rev up free cash flow and return it to shareholders was a main contributor to the degradation of Boeing’s manufacturing and engineering culture.
Perhaps Boeing will be healthy enough one day to resume paying dividends, but the huge share buybacks to give short-term juice to the stock at the expense of operations shouldn’t ever return. That means shares are unlikely to bounce back to their peak of $440 in March 2019, especially if Boeing heeds advice to sell profitable assets at its global services unit.
This leads to another point: Boeing desperately needs to use cash to reduce debt and invest back into the business for years to come. Shareholders should be at the back of the line when profits return.
First, the company must spend to wrap up certification work on key aircraft, including the 777X and the 737 Max-10. Then it’s imperative for Boeing to design and build a new aircraft from scratch to keep up with Airbus SE. The 737, which is Boeing’s best-selling plane, is based on a design from the 1960s. The 777 first flew in the 1990s. A clean-sheet aircraft could cost $40 billion and take eight years or more to bring to market, said Matthew Akers, an analyst with Wells Fargo & Co., who has an “underweight” rating on the stock.
“They’re going to have to develop a new airplane at some point in the back half of this decade,” Akers said. “The big flood of free cash flow that’s expected once they ramp up production is already spoken for.”
Boeing’s recovery as the leading commercial aircraft maker isn’t a slam dunk. Ortberg needs to ramp up production while overhauling the manufacturing culture; settle legal issues lingering from the two 737 Max crashes; certify planes in development; deal with money-losing, fixed-price defense contracts; sell assets; revamp its supply chain, which includes acquiring Spirit AeroSystems Holding Inc.; and appease Federal Aviation Administration officials who now have direct oversight over Boeing’s production as well as members of Congress, who love to pummel Boeing in public hearings.
Even if Ortberg can pull this off, similar to what Culp did at GE, there won’t be much cash left over to return to shareholders for several years.
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