Morgan Stanley said that while the appointment of Kelly Ortberg as CEO has alleviated one investor concern, Boeing still faces major problems in the future.
Futu Holdings notes that Kelly Ortberg will assume the position of CEO of the aerospace and defense giant Boeing (BA.US) on August 8th, which is trying to overcome various challenges. Morgan Stanley said that while the appointment of Ortberg as CEO has alleviated one investor concern, Boeing still faces major problems in the future.
Kristine Liwag, an analyst at Morgan Stanley, said: "Bullish investors believe that current operating performance is closer to the bottom than to the peak." "However, bearish investors are concerned about Boeing's long-term profitability."
Cash flow situation
The company has been burning cash this year as delivery of its best-selling 737 Max was restricted following a deadly accident in January. Investors are looking for signs that Boeing's free cash flow will turn positive in the next 18 months.
"What is the reasonable free cash flow growth to 2025? How realistic is the free cash flow target of $10 billion? What operation conditions does Boeing need to achieve this target?"
The bank predicts that Boeing will generate $5.39 billion in free cash flow in 2025 and $6.74 billion in free cash flow in 2026.
Concerns about Boeing's cash flow have prompted fears that the company may need to raise cash through stock issuance or bond sales. Boeing was already grappling with debt before the pandemic-induced collapse in air travel sent it deeper into the hole to keep itself afloat.
Another key issue is how much the 777X wide-body aircraft program will cost as Boeing prepares to make its first deliveries. The company has a backlog of 540 redesigned planes on order.
Morgan Stanley said that Boeing's acquisition of key supplier Spirit AeroSystems (SPR.US) is another source of investor concern about its operating costs. Boeing spun off Spirit AeroSystems as an independent publicly traded company in 2005 as part of cost-cutting measures. Now, concerns about product quality and supply chain efficiency have prompted Boeing to seek a reacquisition.
Labor Contracts
Meanwhile, thousands of aircraft mechanics are threatening to strike as their labor contract expires on September 12th.
Morgan Stanley said: "Some of the terms the union is seeking include a 40% wage increase over three years, as well as restoring Boeing's pension, and retroactively applying seniority dating back to 2014." "How should we factor in the potential incremental operating costs of this agreement?"
Morgan Stanley said investors will want to know the cash economics of the Boeing 737 Max and 787 Dreamliner projects once production rates have reached higher levels, "as customer discounts gradually diminish and supply chain inflation and labor costs are factored in."
Finally, Morgan Stanley said that the long-term profitability of Boeing's defense and space business is another uncertainty.