Our Favorite Turnaround Story

Showing Signs of Improvement

Last week Boeing (BA) released its fourth quarter earnings results, which provided as a good reminder of why patience pays off in the business. Their results are partially due to new management, and it looks like BA is turning the page on previous woes. At face value, it still was not a great quarter for the company. Revenues declined 30% y/y with an adjusted operating loss of $4 billion. Global services were a bright spot, with revenues of $5.1 billion and a record operating margin of 19.5%. But when we look past the current fundamentals, BA management has moved on from supply chain difficulties, has production lines fully back up and running, and is aligned with its workforce.
Improving production and supply chains is a key focus for CEO Kelly Ortberg. He noted that the company does not have any constraints in the supply chain right now while ramping up production of Boeing 737 models to 38 deliveries a month. Deliveries for the 737 should be in the high 30s for the month of January, and management stated that 2025 could look like 2023 for the company, when they delivered over 400 737 planes and 528 commercial airplanes overall (for reference, BA delivered 348 commercial airplanes in 2024). Following the earnings report, J.P. Morgan increased its 737 delivery estimate in 2025 from 380 to 405.
Kelly Ortberg began working at Rockwell Collins in 2006 as VP and COO. He remained in the position until 2012 when he was promoted to CEO & president. Rockwell Collins stock was up +266% from when Ortberg joined the firm until his departure in 2018 and was up +107% during his tenure as CEO. Management track records are a key quality we look for when analyzing companies – we only invest in companies if we know and have met the management team and appreciate their historical performance. Ortberg has proven himself as a quality CEO in the past, and we believe he is doing so again at BA.
There were many instances throughout the earnings call when Ortberg stated that the spirit around the company is high, likely given the 40% pay increase following the union strike at the end of 2024. We believe with the new management team focused on production, and employee morale increasing around the company, BA’s fundamentals are to improve in 2025 and beyond.

Chart 1: BA is Up Nearly 30% From November Lows

We’ve learned over the previous number of quarters that BA does not have a demand issue, they have a production/supply issue. With all three major factory lines back up and running, this is likely to change in the coming quarter. Demand for their planes remains robust with a $500 billion backlog, and management stated that they aim to reach a 737-production rate of 42 per month later this year.

Discussions emerged last year surrounding BA potentially selling one of its non-core assets to put more focus on production. Ortberg briefly discussed it on the call and indicated that while the company has areas that can be streamlined to focus energy elsewhere, they do not expect there to be major restructuring. Instead, it should be viewed as “pruning the portfolio, not cutting down the tree.” A non-core asset sale in the coming quarter would be positive, as any increase in cash flow for the company would be a benefit. BA ended the fourth quarter of 2024 with $26 billion in cash and $55 billion in total debt.

Chart 2: BA Commercial Airplane Production is Expected to Improve in Coming Quarters

Looking at the coming years, BA has many tailwinds ahead. Management, supply chain, and production problems seem to be in the past, and while current financials are still not great, they are trending in the right direction. Production for Boeing’s 737 and 787 models is increasing, and demand for their products is still very strong. BA operates in a duopoly with Airbus, and as far as we see it, the U.S. government is unlikely to put the president of the United States on a foreign-made aircraft. BA is focused on the right areas of the company – paying down debt, focusing on its core business, improving production capacity, and aligning workers with shareholders. Aviation and aerospace is one of our favorite long-term themes, and BA continues to be a part of that story.

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