Boeing Stock And The Number Behind The Worry

The company’s most important production line appears stable, but the real test for investors is still to come, and it hinges on one critical figure.

For investors in Boeing (BA), a stock that has underperformed the broader market over the past year, the path forward seems clear: turn a large backlog into strong cash flow. The key to that conversion is the production rate of its workhorse 737 jet. While management has successfully stabilized output, the one number that should concern shareholders is the next step-up in that rate.

Right now, the factory floor is operating at a steady pace. Management confirmed that “The 737 program has stabilized at a rate of 42 airplanes per month.” The plan is to lift that to 47 per month this summer. But this is where an investor needs to look past the headline number and understand the mechanics behind it.

Why The Next Step Is The Hardest

The ramp from 42 to 47 planes per month is the more manageable part of the increase, largely because Boeing has been able to rely on a buffer of stored inventory. The challenge begins with the subsequent increase to 52 planes per month. As one executive explained, “once the company burns down its existing inventory, that’s where the supply chain needs to be more in line with our production rate. We won’t have the levels of inventory that we had.”

This isn’t a theoretical risk. An analyst on the company’s earnings call highlighted this vulnerability, noting that a rate of 52 planes per month, “had been a challenge in 2018 for Spirit,” the key supplier Boeing has since acquired. The supply chain has a history of facing challenges at this production level, and this time it will have less of a buffer.

What A Stalled Ramp Would Cost

An inability to increase production smoothly beyond 47 planes per month would affect the company’s recovery. It would cap the company’s ability to convert its large Commercial Airplanes backlog, which stands at $576 billion, into the revenue and profit investors are counting on. More specifically, it puts the company’s long-term financial target at risk.

Management has told investors it views a “$10 billion free cash flow figure as very attainable.” That number is a key part of the bull case for the stock. But that goal is dependent on executing these higher production rates. Any delay would not only postpone that target but could also cause investors to question its feasibility, potentially causing the stock to de-rate. The trailing price-to-earnings multiple of 77.2 suggests the market is already pricing in a successful execution.

For a Boeing investor, the current stability is welcome but shouldn’t be mistaken for the end of the process. The move to 47 planes per month is just the first step. The key factor to watch is how the supply chain performs as the company prepares for the push to 52, because that’s the number on which the turnaround depends.

If it is exposure to aerospace and defense as a whole you want, without this one name’s risk deciding your outcome, an aerospace and defense ETF like ITA covers that single sector.

A Red Flag Like This Is Worse When You Are Concentrated

A warning sign in the numbers is manageable when the stock is one of many you own. It is a different story when that name has become a large share of your net worth – then the metric is not a curiosity, it is your exposure, and selling to cut it back hands a slice to the IRS. There is a way to put a floor under it and diversify out without the tax hit.