Few companies have faced greater challenges in recent years than Boeing (BA) has faced. The aerospace giant can't seem to right the ship amid problems of its own making -- flaws in the 737 MAX and 787 Dreamliner jets -- and Covid travel restrictions. The company still has near-term overhangs, but several issues could see resolution as the year progresses, resulting in a 15%-20% move higher in the stock.
Boeing's troubles are well known and mostly discounted in the shares. Fixes for the 787 Dreamliner, recertifications for the 737 MAX, and Covid-related travel issues have been frustratingly slow to resolve, so Wall Street no longer prices potential positive developments into the shares, which provides a buying opportunity.
To survive the multi-year cash drain, Boeing has taken on significant amounts of debt. Yet, a rally of 20% to $232 would be the equivalent of BA's enterprise value -- or total value -- at $300, which was the bottom of a long trading range prior to MAX groundings. Plus, Boeing is apt to plow free cash flow into balance sheet repair by reducing debt, effectively lowering its EV along the way, which could bolster the valuation.
Airlines have a strong incentive to fly the most fuel-efficient planes, especially with many pledging a goal of carbon neutrality. Newly delivered jets can consume 25%-40% less fuel than ones taken out of service. Delta DAL, which has claimed carbon-neutral operations since March 2020, is rumored to be negotiating a deal to purchase 100 Max planes.
After two full years of Covid travel restrictions, pent-up travel demand is starting to materialize, with airlines seeing strong bookings and full capacity flights. The expectation that people will spend more time on visiting people and places and going out -- and less on consumer products -- will drive travel well into the future. Business and international travel are slower to recover, but may see steady improvements.
China had been slated to receive 75 MAX jets over this year and 90 next year. Reassuringly, on Wednesday, in its annual report, China Southern unveiled fleet plans, and the company continues to anticipate receiving 39 MAX's this year and 103 through 2024. This portends the likely upcoming recertification of the MAX in China.
No doubt, the recent crash of a Boeing 737 NG in China impacts investor sentiment. The model has one of the industry's top safety records, and this China Southern airplane had been in service since 2015. A stock overhang may remain until the results of the investigations are completed.
Another challenge that has dogged Boeing is the structural flaws with the 787 Dreamliner. Boeing has over 100 in inventory awaiting FAA approval of fixes. Timing of a resolution has been folly, but at some point in Q2 it is possible.
Boeing has steadily been increasing jet production rates. Freighter demand has been exceptionally robust. While aircraft deliveries in the first quarter were likely weak with Omicron setbacks, the year-ahead looks promising.
The stock generally follows the productivity of Boeing's commercial airplane division, which historically accounts for over 60% of operating profit. It should be noted that defense, space and security, including aircraft and weapons systems, has an opportunity to see war-related demand strength.
Wall Street has mostly left Boeing shares for dead until discernible progress is made in resolving persistent challenges. Investors have an opportunity to buy BA with minimal good news baked in, yet with an array of positive developments on the horizon in the months ahead. With the backdrop of strongly recovering travel demand, the risk/reward skews highly positive -- making Boeing a top pick for the balance of 2022.
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