Elevator Pitch
I have a Neutral rating for The Boeing Company (NYSE:BA).
Boeing's stock price has been badly hit by the 737 MAX grounding and the coronavirus pandemic in the past two years, after reaching an all-time share price high in March 2019. Looking forward, BA's path to recovery does not seem to be that smooth, with the 737 MAX still being grounded in China and facing new electrical system issues. In additional, the pace of international travel recovery has been slower than expected.
Market consensus expects Boeing to turn profitable and cash flow positive by FY 2022 and for its revenue to exceed 2019 levels by this year, which seems too bullish in my opinion. I don't think Boeing is a good BUY in 2021 despite long-term expectations of passenger traffic growth and aircraft demand being intact. In addition to uncertainty over new 737 MAX issues and the pace of international travel recovery, BA also trades at a premium to its closest peer in terms of forward Enterprise Value-to-Revenue and P/E multiples. Taking into account these various factors, I rate The Boeing Company's shares as HOLD.
Company Description
On its corporate website, The Boeing Company calls itself "a leader in aviation, aerospace and defense technology supporting airlines and U.S. and allied government customers in more than 150 countries." Boeing operates as part of a duopoly with Airbus SE (OTCPK:EADSF) (OTCPK:EADSY) [AIR:FP] in the global commercial airplanes market.
Prior to the grounding of the 737 MAX in 2019 and the coronavirus pandemic outbreak in 2020, BA derived 57% and 65% of its revenue and operating profit from its core Commercial Airplanes business segment, respectively in FY 2018. In fiscal year 2018, the Defense, Space & Security, Global Services, and Boeing Capital business segments accounted for the remaining 26%, 17%, and 1% of Boeing's top line.
In the most recent fiscal year 2020, the Commercial Airplanes, Defense, Space & Security, Global Services, and Boeing Capital business segment contributed 28%, 45%, 26%, and 1% of BA's revenue, respectively. The Boeing Company's core Commercial Airplanes business segment has been loss-making at the operating profit level in FY 2019, FY 2020, and 1Q 2021.
I will be primarily focusing on Boeing's Commercial Airplanes business for the purpose of this article because this segment used to be the company's largest revenue and operating income contributor in FY 2018, and this business segment is key to the company narrowing its losses and eventually returning to profitability in the future. The Commercial Airplanes business segment's reduced revenue contribution and operating losses are the key reason for The Boeing Company's volatile share price performance in the past two years or so, which I discuss in greater detail in the next section.
Boeing Stock Price
The Boeing Company closed at an all-time stock price high of $430.30 on March 1, 2019, with the company reporting new historical highs for its FY 2018 revenue and earnings a month ago on January 30, 2019.
The good times did not last. BA's 737 MAX was grounded in March 2019, following a Ethiopian Airlines 737 Max crash in the same month. Boeing's share price subsequently fell by -25% from its all-time peak to $323.83 as of December 31, 2019. On December 16, 2019, The Boeing Company announced that it will "temporarily suspend production on the 737 program". A week later on December 23, 2019, Boeing disclosed that its Chairman, David L. Calhoun will replace Dennis A. Muilenburg as the new CEO of the company.
To make matters worse, Boeing's stock price dropped to a new five-year low of $95.01 on March 20, 2020 with the onset of the COVID-19 outbreak. The coronavirus pandemic was another major setback for BA's core Commercial Airplanes business segment, as global air travel came to a halt with travel restrictions imposed by various countries to fight the virus.
Boeing's stock price eventually decreased by -34% from $323.83 as of December 31, 2019 to $214.06 as of December 31, 2020, but its share price rose sharply by +125% from its 2020 low of $95.01 registered in March. Specifically, The Boeing Company's stock price staged a strong recovery in November and December 2020, as a result of positive news flow with regards to both the 737 MAX grounding and the coronavirus pandemic. On November 18, 2020, the Federal Aviation Administration or FAA rescinded the grounding order for the 737 MAX. Separately, the World Health Organization or WHO noted in December 2020 that "the first mass vaccination program" has began.
The Boeing Company continued its share price recovery in 2021. Year-to-date, BA's stock price rose by +7% from $214.06 as of December 31, 2020 to $228.18 as of May 5, 2021. While it is probably safe to say that the worst is over for Boeing, the path to recovery might not be smooth sailing as explained below.
Will Boeing Stock Recover
The sustainability of The Boeing Company's share price recovery is dependent on the core Commercial Airplanes business segment paring down its losses and becoming profitable again in time to come. The future prospects of BA's Commercial Airplanes business are in turn affected by 737 MAX deliveries, and the resumption of global travel.
Boeing's Commercial Airplanes business saw its segment revenue decrease by -31% YoY from $6.2 billion in 1Q 2020 to $4.3 billion in 1Q 2021. This represents an improvement from the Commercial Airplanes segment's -50% full-year revenue decline to $16.2 billion in FY 2020. Segment operating loss for the Commercial Airplanes business also narrowed from -$2.1 billion in 1Q 2020 to -$0.9 billion in the most recent quarter. The improvement is largely attributable to the resumption of 737 MAX deliveries after FAA lifted the 737 MAX grounding order in November 2020. As of April 26, 2021, BA has achieved over 85 737 MAX aircraft deliveries. Notably, The Boeing Company also to win new orders for 737 aircraft from a few US airline companies.
On the flip side, the 737 MAX remains grounded in China, a key aviation market. At its 1Q 2021 earnings call on April 28, 2021, Boeing acknowledged that "we're still awaiting 737 MAX regulatory approval from China", and "the timing of it will affect our 737 delivery plan" and "future production rates." To further complicate matters, the lifting of the grounding order for 737 MAX in China might not purely be an issue of safety, as US-China relationships could also be a major factor in when the 737 MAX is allowed to return to service and resume flights in China.
More importantly, there still seems to be lingering issues with the 737 MAX aircraft. Reuters reported on April 29, 2021 that FAA had requested The Boeing Company "to fix bonding issues in the electrical systems of some of its 737 MAX planes that could lead to a loss of engine ice protection loss and critical functions on the flight deck." Reuters followed up with another article on May 5, 2021 which highlighted that BA was required to provide FAA with "fresh analysis and documentation showing numerous 737 MAX subsystems would not be affected by electrical grounding issues." Boeing had earlier revealed in late-April 2021 that about "100 in-service airplanes are impacted" by the electrical system issues", and that will result in its "April deliveries (being) very light."
In other words, the restoration of 737 MAX deliveries to normalized levels prior to the aircraft's grounding could possibly take a longer-than-expected time.
Separately, the resumption of global travel is another key factor that has a major impact on the fortunes of Boeing's core Commercial Airplanes business segment. The International Air Transport Association or IATA's most recent May 4, 2021 media briefing suggests a bleak near-term outlook for global air travel. Based on IATA data, global passenger kilometers flown (RPKs) are still approximately only a third of pre-COVID levels (i.e. March 2019). International travel is expected to take a much longer time to recover as compared to domestic travel. International RRKs have decreased by -87.8% as compared to March 2019 levels, while the decline for domestic RPKs has already narrowed to -32.3%. Travel bookings (as per the third chart below) indicate that consumers are beginning to resume domestic travel, while people continue to delay their international travel plans.
Global Travel Data And Trends
Source: IATA's May 4, 2021 Media Briefing Presentation Slides
There are also other complicating factors. In April 2021, WHO noted that it does not support COVID-19 vaccine passports given "uncertainty over whether inoculation prevents transmission of the virus, as well as equity concerns" according to a Reuters article. A few days ago, IATA also cautioned that a travel recovery "could be perilously compromised by (high) testing costs." More importantly, COVID-19 is not evenly contained in different parts of the world as per the chart below. While weekly confirmed cases of COVID-19 have declined significantly in the US, new coronavirus pandemic cases continue to increase in places such as India and Latin America.
Confirmed Cases Of COVID-19 In Various Parts Of The World
Source: IATA's May 4, 2021 Media Briefing Presentation Slides
In a nutshell, although it is a matter of "when" rather than "if" when it comes to the eventual recovery of Boeing core Commercial Airplanes business, the timing of the recovery is very uncertain with a number of complicating factors as highlighted above.
Boeing Stock Forecast
The Boeing Group reiterated at the company's 1Q 2021 results briefing on April 28, 2021 that "consistent with IATA and other industry groups, we expect passenger traffic to return to 2019 levels in 2023 to 2024." BA also added at the recent earnings call that "recovery in Commercial Services will enable us to turn positive cash flow in 2022."
Sell-side analysts are in general aligned with the company's management on the future financial forecasts. Based on S&P Capital IQ data, market consensus sees Boeing's revenue increasing by +37% and +12% to $79.8 billion and $89.5 billion in FY 2021 and FY 2022, respectively. Wall Street expects Boeing's top line to be flattish in FY 2023, prior to increasing by +8% YoY to $96.0 billion in FY 2024. As a reference, Boeing generated revenue of $76.6 billion in FY 2019 and delivered sales of $101.1 billion in FY 2020.
Boeing is also expected to be profitable and generate positive operating cash flow and free cash flow of $9.4 billion and $7.5 billion, respectively in FY 2022 according to sell-side analysts' consensus estimates. BA has already been both operating cash flow and free cash flow negative for the past two years in FY 2019 and FY 2020, and this is expected to remain unchanged for FY 2021. It is also noteworthy that the company's operating cash flow was -$3.4 billion in 1Q 2021, which was an improvement from its 1Q 2020 operating cash flow of -$4.3 billion.
Nevertheless, The Boeing Company stressed at its recent 1Q 2021 earnings call that "our cash flow profile is heavily dependent upon obtaining the remaining 737 MAX regulatory approvals, the commercial market recovery, and ongoing discussions with our customers on their fleet planning needs."
In other words, it is reasonable to come to the conclusion that current consensus numbers for Boeing are reflective of a base case scenario reflecting market expectations as it stands now. This assumes passenger air travel recovery in 2023-2024, no further issues with the 737 MAX & other aircraft, and the lifting of the grounding order for 737 MAX in China by end-2021 (management estimate).
In my opinion, the current financial forecasts for Boeing are a little too optimistic. There has been a resurgence of COVID-19 in certain parts of the world as mentioned earlier, and the current pace of international recovery is below expectations. It is also uncertain if the latest electrical system issues will result in a further delay in 737 MAX deliveries, and also extend the timing for the rescission of the 737 MAX grounding order in China. I think it is a real possibility that sell-side analysts might consider revising down their financial forecasts for BA in the coming quarters.
Should You Buy Boeing Stock
I do appreciate the investment merits of Boeing as a business in the long term.
Notwithstanding near-term COVID-19 headwinds, IATA highlighted in May 2020 that it expects global air passenger growth to be in the 3.2%-5.3% range for the next two decades. Boeing also similarly forecasted in October 2020 that the company sees an annualized growth of +4% for passenger traffic in the next 20 years, which translates into demand for "more than 43,000 new airplanes" over the same period.
More importantly, the commercial airplane duopoly between Airbus and Boeing is unlikely to be challenged by any company for the foreseeable future, given the significant entry barriers in terms of scale and capital. Also, while Boeing has been affected by the negatives surrounding 737 MAX, BA does have a slight edge over Airbus in certain areas. As an example, Boeing has a relatively broader range of wide-body aircraft or twin-aisle aircraft with existing models like 747, 777X, and 787. In other words, Boeing is expected to remain competitive with Airbus. At its recent 1Q 2021 results briefing, Boeing also noted that Airbus does "better in some segments of that market" and the company does "better in other parts of that market with respect to the products that we field." BA emphasized that it will "try to hold our own with respect to what I think is our rightful share."
On the other hand, Boeing is not as attractive as a stock investment in the near term. As mentioned earlier, the current financial forecasts for BA seem overly optimistic, which leaves room for earnings disappointment if some of the key risk factors highlighted in this article materialize. In addition, Boeing is valued by the market at a premium to its closest peer, Airbus.
Valuation Comparison Between Boeing And Airbus
| Stock | Consensus FY 2021 Enterprise Value-to-Revenue | Consensus FY 2022 Enterprise Value-to-Revenue | Consensus FY 2023 Enterprise Value-to-Revenue | Consensus FY 2022 P/E Multiple | Consensus FY 2023 P/E Multiple |
| Boeing | 2.3 | 1.9 | 1.8 | 42.5 | 31.5 |
| Airbus | 1.5 | 1.3 | 1.2 | 22.8 | 17.8 |
Source: S&P Capital IQ
The key risk factors for Boeing are more of the 737 MAX aircraft being affected by the current electrical system issues, China delaying the lifting of the grounding order for 737 MAX, and the coronavirus pandemic taking a longer-than-expected time to be effectively contained.
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