Al Root

Over the weekend Boeing announced that Ted Colbet, CEO of Boeing Defense, Space, and Security, had left the company. Parting ways like this, for upper management, is the equivalent to firing.

The easiest reason for the decision from new CEO Kelly Ortberg might appear to be Starliner's failed test flight. That is far too simple an explanation, though. Going a couple of layers deeper will help investors figure out when it might be time to think about buying Boeing stock again.

Starliner might, however, have been the straw that broke the camel's back. Ortberg took over in early August, so his first material interaction with the Boeing Defense and Space business was the spaceship's failed test flight.

Starliner is Boeing's reusable space capsule that competes with the Dragon Capsule from SpaceX. It's part of NASA's commercial crew transport program designed to have commercial companies take NASA astronauts to and from the International Space Station. Boeing and SpaceX were awarded their contracts back in 2014. SpaceX completed the certification of Dragon in 2020, while Boeing's Starliner has been plagued by delays and technical problems.

Boeing sent two astronauts in a Starliner to the ISS in June, but technical problems have effectively stranded the astronauts on the space station. They will come home in a SpaceX ship in early 2025.

Starliner has cost Boeing $1.6 billion and counting. That's lot of money, but not all that much in the context of the Defense business, which generates sales of roughly $25 billion a year.

The overall Defense business has performed poorly of late, burdened by fixed price contracts that have become unprofitable amid years of higher than expected inflation. Profitability in the defense business has been declining since 2020 and started losing money in 2022. From 2022 to 2024 losses should total about $6 billion cumulatively, including Wall Street's estimates for the second half of this year.

Colbert, of course, isn't fully responsible for Starliner or fixed-price contracts. He has only been CEO of the business since April 2022. Before that, he ran Boeing's profitable, and still profitable, global services business.

Still, it felt like something had to give. And the change shows investors something about new CEO Ortberg. "At this critical juncture, our priority is to restore the trust of our customers and meet the high standards they expect of us," read part of an internal email sent to Boeing employees announcing the change.

In recent years, Boeing has disappointed its airline and defense customers, including NASA. It looks as if Ortberg is tackling that problem head-on. In addition to changes at Boeing Defense, he has bought a house in the Seattle region and is directly involved in union negotiations.

A Machinist's strike is in its second week. The strike has shut down production of 737 and 777 jets, among other products.

It's too early to declare victory, but his recent actions are a good sign. It isn't about to get any easier for him.

After Starliner, defense profitability, and the strike, Ortberg has to tackle production quality, production rates, and Boeing's ailing balance sheet.

Boeing has amassed almost $60 billion in debt since the second tragic 737 MAX crash in March 2019. Fixing the ailing balance sheet will likely require the sale of stock, diluting existing shareholders.

Coming into Monday trading, Boeing stock was off about 41% year to date, trailing the S&P 500 by some 60 percentage points. Some of the bad news, including a capital raise is reflected in the stock.

Just how much is hard to say. Looking at how Airbus shares trade can help. Boeing's European rival is valued at about 13 times estimated 2027 free cash flow, according to FactSet. For Boeing stock to be trading at the same multiple on 2027 earnings, assuming estimates turn out accurate, Boeing shares imply there will be some $30 billion in equity capital raised over the coming few years.

That's only a rough guide that can help investors judge any reaction to any news that Ortberg has turned his attention to the balance sheet.

Write to Al Root at allen.root@dowjones.com

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September 22, 2024 13:09 ET (17:09 GMT)

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