Boeing (BA) has spent years in well-deserved purgatory, so it may not be easy to believe the skies are starting to clear and the route forward is promising. However, there are catalysts likely to emerge soon, leading to steady improvement over the next few years. The stock is worth jumping aboard for the ride back up, albeit a slow and choppy one.
Undoubtedly, Boeing dug itself a deep hole. Years of mismanagement caught up to the company in two tragic accidents.
Before the first accident in 2018, Boeing had been the toast of Wall Street. The company delighted investors by earning fat profit margins used for large stock buybacks. The accidents exposed egregious safety lapses and production shortcuts. Ultimately, the pandemic led to struggling customers and a bloated inventory from overly optimistic assumptions.
Boeing's current debt level remains the financial legacy of the last three years of stumbles, $62 billion of debt up from $15 billion in 2018. The prospects for vastly improved free cash flow lie ahead from drawing down the inventory of 737 MAX and 787 aircraft along with improved operating efficiency from production increases.
The 737 MAX recertification in China and resuming deliveries of the 787 will likely occur over the next several months. This would remove a significant overhang for the stock by producing positive cash flows to pay down debt next year.
Boeing carries 370 MAX planes in inventory and about 100 787s. With inflation and supply-chain bottlenecks dogging manufacturing worldwide, an inventory of ready-made planes can at least be considered more of an asset than a liability at this stage. Boeing's CEO Dave Calhoun even forecasts possible supply constraints by the second half of next year after 737s are mostly delivered out.
First Class Upgrades
Aircraft orders are likely to pick up as COVID restrictions on international travel continue to ease. Wells Fargo upgraded Boeing shares to "overweight" Wednesday, citing the favorable risk/reward, noting, "The shift in quarantine-free travel in particular appears to drive the latest lift in travel demand." Wells estimates that 20-25% of pre-COVID travel destinations will likely soon lift bans or quarantine restrictions.
Thursday morning, J.P. Morgan also upgraded shares to "overweight," raising their price target to $275. They mention, "Boeing's position at the center of global air travel offers confidence that it will recover financially over time and we believe risk-reward now skews favorably." J.P. Morgan also cautions about the uncertainty of upcoming waves of COVID.
Airlines are eager to lower fuel consumption not only to counter rising oil costs but also for the operating efficiency to meet carbon-neutral objectives. Delta Air Lines (DAL) already has a pledge of carbon neutrality ongoing since last year. Sustainability goals will be a big driver of replacement demand from the current depressed levels -- newly delivered jets operate 25-40% more efficiently than the planes taken out of service.
Solid demand for freighters continues as a notable bright spot. With snarled shipping ports and fewer commercial flights to load cargo, the flow of goods shipped with freighters remains robust.
After settling two accident-related lawsuits for about $500 million earlier this month and COVID travel restrictions waning, Boeing had paid its penance and is almost out from under a dark cloud.
The company has line-of-sight to work down inventory, increase production, and produce cash flow to pay down debt.
New drivers for demand, including recertification of the 737 MAX in China, should catalyze investors to get on board before the stock takes off.