Goldman Sachs analyst Noah Poponak reaffirmed his bullish stance on Boeing Co. (NYSE: BA), despite the defense giant's challenging third quarter marked by production delays, labor disputes and heavy losses.
Labeling Boeing a "long-term deep-value opportunity," Poponak reiterated a Buy rating on the stock in a Thursday note with a 12-month price target of $200, representing nearly 30% upside from current levels.
With robust demand for Boeing's aircraft, a planned capital raise to shore up finances, and fresh leadership focused on operational improvements, Poponak suggests that Boeing is poised for a significant recovery over the next year.
"While Boeing faces a number of challenges, much of that is already priced into the stock," Poponak said, suggesting that investors could see substantial returns if the company can execute its turnaround strategy.
He indicated that Boeing's new management team brings an "external perspective" that could drive meaningful improvements in operational performance and profit margins, setting the stage for long-term growth.
Boeing's Q3: Weak Earnings During Persistent Headwinds
Boeing's third-quarter results revealed the extent of the hurdles it faces. The company reported total revenue of $17.84 billion, a 2% decline year-over-year, in line with analysts' expectations.
Losses were above expectations: core EPS was negative $10.44, slightly missing consensus estimates of negative $10.35 and Goldman's own projection of negative $9.96.
The most significant losses stemmed from the Boeing Commercial Airplanes (BCA) segment, which recorded a loss of $4.02 billion, worse than Goldman's anticipated $3.79 billion loss.
These losses were largely attributed to production setbacks with the 777X and 767 airplane programs and the ongoing impact of a machinists' strike that has disrupted operations.
Boeing's Defense, Space & Security (BDS) division also struggled, posting a steep margin loss of 43.1% as fixed-price contracts on programs like the KC-46A Tanker and T-7A trainer incurred heavy costs.
Boeing Global Services delivered a bright spot, with margins improving to 17% from 16.3% a year ago, driven by higher commercial volumes. The segment's stability underscored the demand Boeing is seeing in the services sector, even as other areas face pressure.
The company's cash flow situation remains strained. Free cash flow in the third quarter stood at negative $1.7 billion, down sharply from negative $300 million in the third quarter of 2023. Boeing ended the quarter with $10.5 billion in cash, or roughly $16.92 per share.
Goldman Sachs expects Boeing to raise an additional $18 billion in capital to support its balance sheet, which could provide essential liquidity as the company navigates these headwinds.
Boeing's labor troubles have also attracted the attention of the White House.
Approximately 33,000 machinists are currently on strike after rejecting Boeing's latest contract offer, posing a significant operational challenge for the company.
The Biden administration has urged both Boeing and the union to continue negotiations with White House Press Secretary Karine Jean-Pierre stating the administration "encourages the parties to continue working to achieve an agreement that works for all."
Goldman Sachs is cautiously optimistic about a near-term resolution, with Poponak noting "the two parties are not far apart on the specifics."
A swift end to the strike would allow Boeing to press forward with its production ramp-up plans, which are essential to meeting the growing demand for its aircraft.
Boeing's order backlog remains substantial, providing a strong foundation for future revenue - but also underscoring the production challenges ahead.
The BCA backlog was valued at $427.7 billion at the end of the third quarter, though it saw a 2% sequential decline, with a book-to-bill ratio of just 0.19x as production fell short of demand.
Meanwhile, the BDS segment's backlog increased by 4% sequentially to $61.6 billion, with a healthy book-to-bill ratio of 1.46x, reflecting strong defense demand.
Poponak sees robust global demand for Boeing's commercial aircraft, particularly as the airline industry continues to recover.
He expects the company to make "significant progress" in ramping up production rates for key airplane models like the 787 Dreamliner and the 737 MAX. Boeing reiterated its target of producing five 787s per month by the end of 2024, a goal that, if achieved, could meaningfully improve cash flow and profitability.
"Exiting 2024 and early in 2025, we believe Boeing will show significant progress on ramping up new airplane production," Poponak said. "Demand for the product remains very strong."