stock has had a nice run. One analyst though has reminded investors that suppliers might not be able to keep up with the commercial aerospace giant. That could become a headwind for shares in 2023.
RBC analyst Ken Herbert downgraded
stock to Hold from Buy on Friday. He maintained his $225 price target on the shares.
Herbert sees persistent production problems holding back the stock after a recent run. “We are seeing greater cracks in the supply chain,” wrote the analyst in a report. “A key issue continues to be hiring, which should continue to get better as the broader economy slows, but the level of training on the new hires could be substantial.”
Herbert just isn’t sure the supply chain can keep up with Boeing’s production plans. He sees most of the stress in the supply chain at tier 2 and 3 levels. Those are levels below the largest aerospace suppliers such as
(RTX), which deal directly with Boeing.
“Continued supply chain execution challenges will limit near-term upside deliveries, and will be an overhang on investor sentiment,” added Herbert. “We do not expect downside to the 2023 MAX delivery guidance, but expect inconsistent production levels preventing investors from giving the stock full credit for the expected 2025/2026 free cash flow upside.”
The 737 MAX was grounded worldwide between March 2019 and November 2020. The company built hundreds of jets it couldn’t deliver before stopping production. The company is producing about 31 MAX jets a month now and has plans to take that to 50 month in coming years.
Higher production will lead to higher cash flow. Wall Street projects Boeing will generate about $10 billion in free cash flow in both 2025 and 2026. Boeing generated about $2.3 billion in free cash flow in 2022. It was the first year of positive free cash flow since 2018, the year before the MAX grounding. Boeing generated about $13.6 billion in free cash flow in 2018.
If production problems materialize investors will begin to question free cash flow in later years. After the nice run in Boeing stock, Herbert sees the risk/reward equation changed.
Coming into Friday trading, Boeing shares have gained about 34% over the past three months.
Following the downgrade, Boeing stock was down about 0.7% in premarket trading Friday at $207.85.
Dow Jones Industrial Average
futures were off about 0.5% and 0.2%, respectively.
With the downgrade, about 63% of analysts covering Boeing stock rate shares at Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 58%. The average analyst price target is about $227 a share.
Write to Al Root at firstname.lastname@example.org