INVESTMENT THESIS
Boeing Co. (NYSE: BA) is BUY. Boeing is among the largest aerospace and defense companies in our coverage universe, and we think it has superior long-term prospects due to its significant backlog and strong presence in the growing commercial aerospace industry. Further, its profitable Defense segment is a top 5 defense contractor. The company faces numerous near-term challenges, including the spread of COVID-19, which has curtailed air traffic, and cash flow issues. The company has cleared a major hurdle, though, as the U.S. Federal Aviation Authority has rescinded its grounding of Boeing’s MAX 737 jet, which had been the company’s prime revenue and earnings driver prior to two fatal crashes in 2018-2019. A new CEO has come on board and is leading a turnaround. The shares are down almost 50% from their all-time high of $440, set in February 2019. Looking ahead, once the 737 MAX is back in the air and Boeing is accelerating production, we see earnings power of $15-$20 per share. It looks like that will be 2023 at the earliest.
RECENT DEVELOPMENTS
The beta on BA is 1.40.
The shares remain approximately 50% below their all-time high as the company weathers the coronavirus crisis and continues to respond to the two fatal airplane accidents involving its 737 MAX jet. The March 2019 crash of Ethiopian Airlines Flight 302 followed the crash of a Lion Air jet out of Indonesia in October 2018.
The U.S. Federal Aviation Administration has now rescinded the order that halted commercial operations of the 737 Max, allowing the airlines that are under the FAA’s jurisdiction to take the steps necessary to resume service and allowing Boeing to begin making deliveries.
The planes had been grounded around the world, and Boeing, led by a new CEO after the former CEO was ousted, had suspended 737 MAX production, delivering a blow to revenue and earnings in recent quarters.
Management now expects delivery of about half of the 450 aircraft currently in storage by the end of next year and the majority of the remaining jets in the following year.
Boeing recently reported 3Q results that included a 29% decline in revenue and a loss for the period. On October 28, Boeing posted consolidated 3Q revenue of $14.1 billion, down 29% year-over-year. The non-GAAP core operating loss for the period was $1.39 per share.
The onset and spread of the coronavirus has also had an impact on results. In August, domestic passenger operations reached approximately 50% of last year’s levels, whereas international traffic is down 88%. Boeing anticipates that air passenger traffic will not return to pre-COVID levels until 2022, and that the long-term growth trend of 4%-5% will not resume for another few years after that.
The promising COVID-19 vaccine developments in recent weeks have been welcome news for Boeing.
EARNINGS & GROWTH ANALYSIS
Boeing is due to report 4Q EPS in late January. The company has reported adjusted earnings per share losses for four quarters in a row. Earnings and estimates have been murky and volatile as analysts incorporate ever-changing charges, the uncertainty surrounding the return of the MAX, and the impact of the coronavirus. The current consensus loss estimate for 4Q20 EPS is $0.96, and the range is wide. Estimates range from a loss of $1.81 to earnings of $0.39. Our full-year 2020 estimate is a loss of $9.00 per share.
The consensus forecast for 2021 is a profit of $1.49, but the Street has its doubts, with estimates ranging from a loss of $3.00 to a high of $8.00 in adjusted EPS. We think the FAA’s lifting of the rounding of the MAX raises the likelihood that the company returns to profitability in 2021. The preliminary Argus EPS estimate for 2021 is $4.00, in the middle of the Street range.
FINANCIAL STRENGTH & DIVIDEND
Boeing has a share repurchase program, but has announced that it will not buy back shares while the 737 MAX remains grounded.
MANAGEMENT & RISKS
David Calhoun is Boeing’s new CEO and president. Gregory Smith serves as CFO.
Boeing has been attempting to resolve several issues in order to move forward and resume its growth trajectory, which had been impressive for most of the past decade.
The first was fixing the 737 MAX, which now appears complete.
The second was getting the plane recertified. This box also now appears checked, though the FAA must still approve pilot training procedures for the U.S. airlines flying the Max, and the planes need to be updated with new software and wiring.
The third is convincing Congress, Wall Street and air travelers that the company has learned from its mistakes, is reforming its culture, and is focused on the safety of its planes. Boeing’s former CEO, Dennis Muilenburg, was stripped of his chairman title last year by the Boeing board and removed as CEO in January 2020. The new CEO, David Calhoun, is a former Boeing board member and former head of General Electric’s Transportation and Aircraft Engines division. He is currently undertaking an emergency communications campaign to repair relations with key constituencies. In his conference calls with Wall Street analysts, he has come across as open and transparent.
Boeing will also have to convince its customers to maintain and increase their orders – which may be difficult in the age of the coronavirus. The main competition for the 737 MAX is the Airbus A320, which also scores high in fuel efficiency. Both of these planes are important cogs in air travel today, providing service on shortand medium-haul routes. The industry had been healthy. Global passenger traffic had been growing at a 4.5% rate, above the global GDP growth rate of about 3.0%. While the outlook has been reduced for the next few years, we do expect faster-than-GDP growth to return over the long term. The COVID-19 vaccines help here. American Airlines is expected to be the first carrier to fly the MAX, with plans to use the plane from December 29 through January 4 for flights connecting Miami International Airport and La Guardia Airport in New York. United and Southwest Airlines are also expected to fly the MAX in 1H21.
COMPANY DESCRIPTION
Boeing manufactures commercial jetliners and military aircraft as well as rotorcraft, electronic and defense systems, missiles, satellites, launch vehicles, and advanced information and communication systems. The company was founded in 1916 and is based in Chicago.
VALUATION
The shares are down about 50% from their all-time high of $440, set in February 2019.
The models are now somewhat distorted, given Boeing’s eliminated dividend, recent losses and depressed forward earnings estimates. Once the 737 MAX is back in the air and Boeing is accelerating production, we see earnings power of $15-$20 per share. It looks like that will be 2023 at the earliest. Despite the recent run, we still see value in the depressed shares, and are raising our 12-month target price to $240.
On November 25 at midday, BUY-rated BA traded at $218.90, up $0.41.
Source: Argus
