Hold Boeing Stock? Here's the 1 Thing Long-Term Investors Need to Focus On.

The key to Boeing's (NYSE: BA) long-term future lies in its ability to develop the next generation of narrowbody airplanes to replace the 737 MAX. It's a fact implicitly recognized by CEO Kelly Ortberg on his first earnings call in October when referring to "restoring the balance sheet so that we do have a path to the next commercial aircraft." Here's what you need to know before buying into the stock for the long term.

A long-cycle investment

It takes years and many billions to develop a new aircraft, which will be the case with the next generation of narrowbody aircraft. Former CEO Dave Calhoun is on record as saying Boeing won't be introducing a new airplane until the middle of the next decade, and he also believes it would require a $50 billion investment.

While 10 years seems like a long time away, investors should already focus on the matter due to Boeing's financial position. The usual pattern in so-called long-cycle industries involves a period of heavy investment until an airplane's first delivery, followed by a period of gradually increasing cash generation as deliveries and profit margins ramp over the years. The cash generated can then be invested in developing the next generation of airplanes.

Boeing's cash flow and debt problem

Unfortunately, the cycle of cash flow generation from the 737 MAX (first delivered in 2017) was negatively impacted by its high-profile grounding due to safety issues and the pandemic.

You can see the dynamics at play in the following charts.

• Capital expenditures ramp ahead of the first delivery of the 737 MAX in 2017, and that holds back free cash flow (FCF) generation.
• Capital expenditures started to decline in 2017, and Boeing began to improve FCF while its debt situation remained healthy.
• The 737 MAX grounding in 2019, then the pandemic, and then the grounding in 2024 with an existing cap on 737 MAX production of 38 a month, and ongoing losses in the defense business (Boeing Defense, Space & Security, or BDS) all caused significant cash outflows and ballooning in debt.

The question then turns to how Boeing will fund a potential $50 billion investment when, at the end of the first quarter, it held $53.6 billion in consolidated debt offset by $23.7 billion in cash and marketable securities, resulting in $29.9 billion in net debt?

How Boeing can achieve its aims

The obvious answer is to improve FCF by executing better on its whopping $545 billion backlog by ramping 737 MAX production, keeping the new widebody 777X on track for first delivery in 2026, and getting the BDS segment back to profitability and cash flow generation. While these things are not a given, they do lie within Boeing's power to do so, as they rely more on internal execution rather than end markets.

Image source: Boeing.

Wall Street analysts are optimistic on these matters. The consensus calls for FCF to improve from an outflow of $3.8 billion in 2025 to a generation of $8.8 billion in 2027 and a reduction in net debt to $18.8 billion. Assuming Boeing can return to FCF north of $10 billion a year (as it did in 2017 and 2018). In theory at least, the aircraft maker can pay off its debt by 2029, and there will be ample opportunity to support investment in a new $50 billion airplane out of FCF until the middle of the next decade.

Is Boeing stock a good value

The company must navigate a lot to get there (not least tariff uncertainty, improving delivery rate and quality on the 737 MAX, keeping 777X on track, and returning BDS to high single-digit profitability). Still, on a positive note, there are early signs of improvement under Ortberg, and Boeing is essentially a self-help story due to its massive half-trillion-dollar backlog.

Image source: Getty Images.

That said, it's hard to argue the stock is notably undervalued. Even if Boeing gets to, say, $10 billion in FCF in 2030, the funding requirement for the new narrowbody aircraft will hold back FCF generation at least until the mid-2030s.

Therefore, it isn't a case of plugging $10 billion as a base for future FCF generation. With the current market cap at $134 billion, it would need $6.7 billion in FCF through the cycle to equate to a 20 times FCF multiple. That's not an easy assumption, given the challenges ahead and the need to invest in a new narrowbody. As such, while Boeing looks undervalued, and the newsflow is positive, it's far from a screaming buy right now.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.