Supply-Chain Concerns Downgrade Boeing Stock

It has been a nice run for Boeing BA +0.26% stock over the past few months. According to one analyst, suppliers may not be able to keep up with the demands of the commercial aerospace giant if they don't invest in new technology. It is possible that this could turn out to be a headwind for shares in 2023 as a result of that.

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Boeing stock was downgraded by RBC analyst Ken Herbert from Buy to Hold on Friday. Shares of the company were maintained at $225 as his price target.

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The stock is still being held back by persistent problems in the production process after a recent run, according to Herbert. In a report published by the analyst, he noted that we are seeing greater cracks in the supply chain. "Hiring remains a major concern for the company, which should continue to improve as the broader economy slows, but there may be a considerable level of training required for the new hires."

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Herbert is unsure whether the supply chain will be able to keep up with Boeing's production plans in the coming months. As a result, he has seen most of the stress in the supply chain at tier 2 and tier 3 levels. These are the levels below the largest aerospace suppliers such as General Electric GE -1.15%  (GE) and Raytheon Technologies RTX +0.04%  (RTX), which deal directly with Boeing.

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Herbert stated that continued supply chain execution challenges will limit near-term upside deliveries and will adversely affect investor sentiment. “It is our expectation that the 2023 MAX delivery guidance will not be affected by any downside, but that inconsistent production levels will prevent investors from fully recognizing the stock's expected free cash flow upside during the period 2025-2026.”

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There was a grounding of the 737 MAX worldwide between March 2019 and November 2020. Hundreds of jets were built by the company but they were unable to deliver them before production halted. In the coming years, the company plans to be able to produce about 51 MAX jets a month and in the next few years will be able to manufacture 31 jets a month.

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An increase in production will result in an increase in cash flow for the company. As per TradeAlgo, Boeing is expected to generate about $10 billion in free cash flow both in 2025 and 2026. It is estimated that Boeing generated 2.3 billion dollars of free cash flow in 2022. A positive free cash flow was achieved for the first time since 2018, which was before the grounding of the MAX. It is estimated that Boeing generated a free cash flow of about $13.6 billion in 2018.

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It is likely that investors will begin to question free cash flow in the future if production problems materialize. There has been a significant change in Herbert's perception of risk and reward after the recent run in Boeing shares.

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Over the past three months, Boeing shares have gained approximately 34%, and coming into Friday's trading, Boeing shares were up about 34%.

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In premarket trading on Friday, Boeing stock was down about 0.7% at $207.85 as a result of the downgrade. Among the major indices, the S&P 500SPX -0.24% and the Dow Jones Industrial AverageDJIA -0.15% futures were down about 0.5% and 0.2%, respectively.

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In light of the downgrade, 63% of analysts who cover Boeing's stock rate the shares as Buys. According to the S&P 500, the average Buy-rating ratio is about 58% for stocks within the S&P 500. It is estimated that the average analyst price target for the stock is about $227 a share.