Boeing (BA) finally received Federal Aviation Administration approval this past week to start delivering 787 Dreamliners, a major milestone toward the aerospace giant's recovery. Shares of Boeing have risen almost 50% off the recent June low, partly in anticipation of this news. But is now time to get aboard?
Let's roll down the runway of what's been happening, what to expect and when to launch a position.
Because of its recent rise in share price, now's probably not the best time to chase the stock. Other the other hand, the free cash flow generation critical to Boeing's financial improvement should benefit from the FAA news.
With the FAA approval, the 120 Dreamliners in inventory will get worked off over the next three years, estimated at $17 billion in revenue. Deliveries from inventory will be a methodical process; the FAA still plans to inspect the carbon-composite frame of each 787 to ensure Boeing's process for addressing manufacturing flaws. BA still has to submit paperwork to the FAA to restart deliveries, suspended since May 2021. Separately, Boeing has plans to ramp production of the Dreamliner to six planes per month by 2025. With inventory work-offs and new production, Boeing can potentially deliver 100 or more 787s annually starting in 2024.
Boeing is slowly checking off the boxes for the necessary stages to regain its financial footing. Wall Street is now anticipating the catalysts that remain, including the recertification of the 737 MAX in China. China is the last country to recertify the MAX, and the timeline for 737 delivery resumption has been continually pushed back. Recent reports that China Southern conducted a 737 MAX test flight departing from the city of Guangzhou and landing in Nanyang appears a positive signal. Commercial service in China has been suspended since the 737's grounding in 2019, and any current progress is noteworthy. Approximately 124 deliveries are due to China in 2023, making up around 16% of total deliveries expected for the MAX in 2023. Still, the tensions with China over House Speaker Nancy Pelosi's visit to Taiwan may temper the enthusiasm for imminent approval -- all the more reason to wait to buy on weakness.
On Boeing's recent earnings call, management did lower expected MAX deliveries for this year from 500 to 400 planes. Nonetheless, cash flow looks to be positive for the remainder of the year, with vast cash flow improvements next year and after that. Global air traffic is around 60% of pre-Covid levels, although far higher domestically. There's room for continued progress over time, although a pilot shortage and additional China lockdowns can lead to a slower pace than hoped. In the near term, this may cap demand for new aircraft. At the Farnborough Airshow, Boeing did announce an important order from Delta (DAL) to buy 100 of the 737 MAX 10 jets.
The MAX 10 has a regulatory quirk that still needs resolution. The FAA has warned that the upcoming Boeing 737 MAX 10 certification is unlikely to be completed by the end of the year. This could leave the 737 subject to new safety standards for flight deck alerts. Boeing hopes to get legislative relief if it's not certified by year-end, or it has threatened to scrap plans for the aircraft.
Boeing is on the mend and the outlook is starting to look auspicious. There are positive catalysts on the horizon, including recertification in China and a resolution for the 737 MAX 10 planes, but these may take longer to materialize than investors expect. After close to a 50% rally off the June low on genuinely positive news and market enthusiasm, the stock can be bought with confidence only after a 10% or more pullback.
