Boeing announced on Monday that CEO Dave Calhoun would step down, with the search for a replacement underway. The jet maker has experienced a slew of safety incidents, prompting a DOJ probe. Bank of America Senior Equity Analyst Ronald Epstein joins Yahoo Finance Live to discuss his Neutral stock rating and what to expect from Boeing's new leadership.
In Boeing's internal and external search for a new CEO, Epstein explains that the candidate must be able to generate goodwill internally and repair relationships with airlines, the public, and regulators like the FAA. A broader cultural change is also in order, the analyst claims: Boeing will need to improve execution, prioritize safety over the time it takes to manufacture airplanes, and begin developing its next product.
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Editor's Note: This article was written Gabrel Roy
Video Transcript
AKIKO FUJITA: With less than 30 minutes left to go in the trading day, shares of Boeing holding onto gains, but off the best levels of the day. The troubled jet maker announcing CEO Dave Calhoun will step down at the end of the year. Search is now underway for a replacement.
Let's bring in Ronald Epstein, Bank of America Securities Senior Aerospace and Defense Analyst. Ron, let's try to move the conversation forward here. What are some names you're thinking about, in terms of who needs to take the helm at this company given where it is right now?
RONALD EPSTEIN: Well, they've said they're going to have a broad search, right? So the new chairman of the board is going to execute a search, most probably internally and externally. The candidate, or candidates, they're going to need to have some specific skills.
They're going to have to generate goodwill from the-- internally, from employees. They're going to have to repair relationships with regulators, namely the FAA. They're going to have to repair relationships with the airlines. And they're going to have to repair relationships with the flying public.
And they're also going to have to be an operating executer. So it's a big bill to fill. I'm certain there's some internal talent. But I'm certain they'll also look externally.
JOSH LIPTON: Do you think, Ron-- listen. They've-- you know, they're making some big changes in the C-suite here. But do you think there's kind of broader cultural changes that need to happen at Boeing as well?
RONALD EPSTEIN: Yeah. This is part of it, right? I mean, we've been writing for some time that Boeing is going to require a broader cultural change to improve execution. To put aircraft fabrication over-- you know, the time it takes to build airplanes. Make that, you know, secondary to safety.
I mean, that's been the issue. They've flipped that around, to make safety more important than the time it takes to build an airplane. And probably the most important thing that Boeing is going to have to do is think about what that next airplane is going to be.
You know, Dave Calhoun said earlier today in an interview that this next CEO is going to oversee the development of a new airplane that could cost upwards of $50 billion. We've been saying for some time that Boeing has to do a new airplane. And so, this new CEO is not only going to have to fit the bill that I said before, but also have the engineering prowess and the strategy to understand how to develop a new product that could be in the markets for upwards of another 50 years like the 737 before it.
AKIKO FUJITA: Ron, that list you just ticked off about what needs to change at the company is a long one. This is not an overnight transition that we're looking at. With that said, is it time for investors to reset expectations for the company?
RONALD EPSTEIN: Well, I mean, the company-- interestingly enough, we hosted a conference last week in London as the Bank of America Global Industrials Conference. And Boeing CFO Brian West spoke at that conference. And at that conference, he reset financial expectations.
And at the conference, he mentioned that the company, in the first quarter, had burned through somewhere between $4 to $5 billion, and have -20% earnings margins, EBITDA margins, in the commercial airplane business. And that the company would maybe get to $1 to $2 billion of cash flow for the year in aggregate. And that aircraft production would exit the year at maybe at about 38 airplanes. That was a reset there.
Investors need to think about financial targets and medium and longer term targets with a change in leadership regime. They tend to change targets too. You know, I don't think anybody would argue with the fact that it was time for a change.
Change is happening. It brings uncertainty. We'll see who the next leader-- leadership regime is. And they'll bring their view and their outlook, and everything with them.
JOSH LIPTON: Ron, right now, your rating is a neutral. So you're on the sidelines with this name. What would you-- what do you need to see, Ron, before getting more bullish on Boeing?
RONALD EPSTEIN: Well, when you think about Boeing, there's really a tug of war between a very, very strong commercial aerospace market. If you look at demand for airplanes today, it's exceedingly strong. People are flying. Air traffic is growing.
However, that's offset by the uncertainty in production that Boeing's been confronted with, and particularly in the 737. A little bit on the 787. They're still having to certify a couple of their 737 models. And the 777X is still in development.
So, you know, there's a tug of war between the two. So good and market lagging execution. I mean, obviously, if one can get a feel for better execution, maybe that could make one feel better about the stock.
But right now, I don't think anything's going to change overnight. And we're very comfortable with our neutral rating. And we think the stock will be range bound.
JOSH LIPTON: Ron, thanks so much for joining the show today. Appreciate it.
RONALD EPSTEIN: Thank you.
