Is Boeing Stock a Buy?
Sep 30, 2022Price Target: $170 (36% upside)
Current Price: $125
Target Date: 7-9 Months
Rating: Overweight
Just like Airbus, Boeing still has not been able to reclaim its pre-pandemic highs.
Trading in the mid $300's from 2018 till the start of 2020, Boeing still has a long way to go before catching back up.
Even in more recent times, Boeing is still underperforming the S&P as it lagged by nearly 6% over the last week alone.
So with all this underperformance, you may be surprised to hear that we're actually announcing a new position in the beaten-up stock.
This is because, over the short run, we view this move as completely unrelated to their fundamentals and moreso as an overreaction to their volatility due to their relationship with to the S&P (e.g. beta risk).
And over the longer run, we see some really promising things coming down their pipeline.
Let's us explain further 👇
Boeing Short Term Performance:
But before we dive into it, if you're not familiar with Boeing, they're one of the world's largest aircraft manufacturers.
While they have three other divisions they're mostly known for producing popular planes such as the: 737, 747, 767, 777, and 787, along with a freighter plane and various other business jet variants.
So during the focus of this analysis, we're only going to cover their main business unit. And when looking at this business unit, there are no conceivable reasons why Boeing is trailing the S&P 500.
While there are always outliers, more often than not, where an index goes, the stock will follow.
And in order to understand how much/little it will follow -- we look at something called a stock's beta. While we won't dive into this too much, at a high level a stock's beta is more or less a measurement of how volatile a stock is relative to the overall market.
So if a stock has a beta of 1.2 and the market falls by 1%, the stock should fall by 1.2% and vice versa.
And when we look at Boeing in particular we can see that this underperformance of 6% relative to the index is mostly attributable to their beta -- which is currently around 1.4.
While this doesn't explain the entire picture, it still represents most of the volatility associated with the name as there hasn't been any other news that should fundamentally alter Boeing's performance for the worse.
That's why we view this move downwards as inconsequential and is just due to the market sell-off. And that's why, like with so many other stocks, all we care about is what's achievable over the foreseeable future.
And in the case of Boeing, we're seeing some really strong indicators that tell us they are set up for success moving forward.
Therefore with the large sell-off we've seen so far, we believe this is just a buying opportunity to get into Boeing at depressed prices. But let's get into the longer-term details.
Boeing Long-Term Performance:
As we just mentioned, Boeing has several key updates that give us long-term confidence in the company to grow over the next several years. Let's discuss some of those factors.
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This wouldn't be a comprehensive analysis if we didn't cover the 737 MAX 8. In case you were living under a rock, the 737 MAX 8 is one of the most controversial planes of the last decade due to a few crashes that we later found out was because of Boeing's negligence. However, as of late, there's been new activity regarding this highly debated aircraft. While in America it's been back in use for some time, in China the CAAC (the equivalent of the FAA in America) recently met again to discuss the future of this aircraft within their borders. While no decision has been made yet, the CFO of Boeing recently indicated that they are starting to remarket some of the aircraft that could be reserved for Chinese customers. While the 737 MAX 8 will still need to complete its passenger regulatory approval, we view this development as MAJOR.
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This enablement would help Boeing massively outperform the expectations they gave investors earlier this year regarding 737 MAX 8 deliveries over the next few years (estimated at the time to be around 1,000 over the next 2 years). If this gets pushed through, we estimate that the Chinese order book could eclipse 200 aircraft alone over the next 5 years. While Boeing does not need China to "survive" these 200 planes ordered would be a massive boost in revenues going forward.
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Past the 737 MAX 8, the 737 Max 10 is Boeing's future line of aircraft. While the Max 10 is yet to be in service, orders of the plane are well in stock. It's estimated that ~600 Max 10's have been ordered with the distribution of planes over the next 5 years to be stable. The size of this order book signals two things to us:
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The first is that it signals a massive amount of demand for its aircraft. Ex-China, 600 net new planes represents a huge boost in revenue to the company -- in addition to revenues from the boost of the Max 8.
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The second is that Boeing is seriously trying to go after Airbus as this plane is set to compete with Airbus's A321. While the A321 both has a headstart and is winning massive market share, we estimate that the new Max 10's will still be able to grow its presence.
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However, one thing to be highly conscious of is the recent warning by the FAA, which stated that the upcoming Max 10's certification is unlikely to be completed by year-end. If this happens, this could become an issue for Boeing given some recent reforms by Congress -- which speaks to how new planes will be regulated and checked. However, should this even occur, Boeing's management team has stated that they believe they will likely be grandfathered in, regardless.
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In case you were wondering, the new legislation requires any plane certified after 2022 to possess an Engine Indicating and Crew Alerting System. While the system itself isn't major, it would require new pilot training - would end up being decently expensive, and delay Boeing's timelines.
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Boeing Outlook:
While the last factor is certainly something to be aware of, we believe that the risk is already largely priced in.
Additionally, over the long run, Boeing stands to benefit massively from a huge slate of deliveries due both in the US, Europe, & China.
Any speed up from the Chinese government, the retirement of other legacy planes, and/or ROI on deliveries, would only cause this stock to spike further past our base case.
Therefore we arrive at our price target of $170 by discounting EBITDA and FCF over the next few years (given our projections) and assigning an ~16x multiple on FCF -- to be conservative.
Risk/Reward: High/ High
Ticker: BA
Market Cap: $74B
Dividend Yield: N/A
