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Boeing: A Significantly Undervalued Play On A Cyclical Recovery

Jun. 04, 2020 3:34 AM ETThe Boeing Company (BA)43 Comments
AB Capital profile picture
AB Capital


  • Emerging signs of a travel recovery in May is a key positive for the Boeing bull case.
  • Order activity in April has been depressed, as expected, but the resumption of 737 MAX production is a step in the right direction.
  • The defense business remains cash-generative and should offer a stable funding source in the meantime.
  • At current levels, the Civil business trades at a compelling normalized FCF yield of ~16-17%.

Following my last Boeing (NYSE:BA) article, I've only gotten more bullish on the stock. With travel on the mend and Boeing's defense business providing a stable cash generator to fund ongoing development across both sides of the business, Boeing remains an underappreciated stock, in my view. At current valuations, Boeing offers investors an undervalued play on a cyclical commercial demand recovery, with the potential re-certification of the 737-MAX and the ramp-up of its defense platforms, serving as additional catalysts. At current valuations, BA remains significantly undervalued, in my view, with the civil business trading at an implied normalized FCF yield of ~17%, by my estimates.

Encouraging Travel Data Points Toward a Recovery

Per the latest TSA checkpoint numbers, May has seen a notable uptick in travel across key markets, with airlines slowly adding capacity to their June-July schedules – likely in response to a pick-up in leisure travel. So while passenger numbers are still down >90%, the sequential improvement signals that we have likely reached the bottom.

Source: Ailevon Pacific Aviation Consulting

The recovery seems to be in-line with China's travel recovery, which also continues to trend in the right direction. For context, domestic air travel capacity in China has already recovered ~50% of pre-COVID levels (see chart below). With COVID seemingly under control, I expect continued steady improvement in domestic travel, especially with summer on the horizon.

Source: ForwardKeys

International travel, on the other hand, remains a key question mark – both with regard to the timing and how the shape of recovery will look like. Without a vaccine, my base case remains for international travel to come under pressure until 2021, which should drive increased pressure on wide-body demand.

Order Activity is Also Key

The outlook for order activity is understandably bleak - BA booked zero gross orders in April, which

This article was written by

AB Capital profile picture
Semi-retired investor and former buy side professional. Keeping an eye on special situations and event-driven opportunities across the equity and credit universe. All views are my own.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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