The post-pandemic recovery of air travel and international tourism demand provides good earning opportunities for companies hit hard in 2020, and The Boeing Company (NYSE:BA) is one of them. However, the broad economy is not the only thing to shape Boeing's valuation. Despite the opportunities, the company is still not making money due to production line stoppages and delayed shipments.
In the previous article, we highlighted Boeing's questionable short-term outlook, and our expectations of the stock's performance have been borne out. After the recent collapse of Boeing's Q1 2022 financials, Boeing's quotes have dropped, and, according to our calculations, the stock is now trading at its fair levels.
Boeing stock is still far from the entry point due to several factors. The main issue is uncertainty about the 777x model, whose sales have been moved from 2023 to 2025. It is also possible that Boeing will start to attract debt or dilute the stock again because of the company's unprofitability.
The air travel market keeps its recovery to pre-pandemic levels. Despite the COVID-19 outbreak in China, which had a significant impact on air travel in Q1 2022, we do not revise our outlook assuming full market recovery by 2024. Boeing is a direct beneficiary of this phenomenon - airlines will increase their CapEx programs and acquire aircraft into their fleets to meet growing demand, so as the broad airline market grows, Boeing could significantly improve its performance in Commercial Airplanes and Global Services segments.
Commercial airplanes production is the largest Boeing segment by revenue and continues to be challenged by regulatory actions by the FAA and delays in production of new models. At the end of Q1, the company announced one more shift in its forecast for new model supplies. Particularly, one of the most anticipated models, the Boeing 787, whose sales were halted in Q2 2021, is likely to be available for supply only in Q3 or Q4 2022. Sales of the 777X model (cargo aircraft) have been postponed from late 2023 to early 2025 due to FAA approval, despite recent successful testing and demonstration in the UAE.
The company's best-selling model, airliner Boeing 737, has recently been the subject of intense debate from aircraft companies and regulators. The plane crash in China, which is still under investigation, has created doubts about the reliability of the model supplied. Thus, some Chinese airlines have scaled back plans to buy new Boeing models for their fleets. Nevertheless, the company's products have not completely left the market despite reduced demand in China, but the epidemiological situation in the region also creates additional challenges. Lockdowns have disrupted the resumption of the B-737 MAX model supplies to China, a deal almost agreed upon, according to the management. In 2023, Boeing competitor Comac C919 may press the Boeing 737 in Asia. However, complete replacement of the 737s, let alone the entry of a new airliner to broad markets, is unlikely in the near future.
The U.S. government is the main customer of Boeing in the defense segment. The company supplies the Department of Defense with military aircraft and works closely with NASA.
Despite expected increase in total U.S. defense budget, aircraft purchases in 2022-2023 will decrease compared to 2021. NASA will also not receive significant additions to its annual budget, with only 3% y/y increase in 2022 and 8% requested increase in 2023, which could be reduced depending on the government's decision.
As per our calculations, the effect of the 2022 defense budget reduction on the aircraft budget will hit Boeing's segment revenue by -9.6% y/y.
In addition to declining revenues, Boeing business margin is also affecting its investment prospects.
The company's main problem now is the costs caused by the shutdown of production lines. Management estimates about $2 bln is the irrecoverable part of the losses, mostly caused by the freeze in B-787 production. The company hopes to write off costs by the end of 2023 - that is, about $300 mln per quarter. Q1 margin was also negatively impacted by higher development costs, but we don't think this will be long-lasting due to the size and nature of Boeing's business.
Another equally important aspect is the macroeconomic component. In Q1 2022, aluminum prices and labor shortages were the most significant contributors to financial results. We do not believe the effect will last too long due to the cyclical nature of the economics, but Boeing could return to historical margin levels by 2024, by the time the airline market is fully recovered and the commercial vehicle supply chain is stabilized.
Therefore, we change our 2022 EBITDA forecast from $6,912 mln to $2,207 mln and from $10,787 mln (+56% y/y) to $9,683 mln (+340% y/y) in 2023.
Boeing is a beneficiary of the recovering demand for airline services, but the company's internal problems related to constant postponements of aircraft supplies and losses related to the same reason are already reflected in the market value.
Factors that will affect the acceleration in the value of securities over the next 12 months:
We estimate our target price for Boeing stock at $154 per share and believe the market is now fairly valuing the company from a fundamental position. HOLD rating, upside - 23%.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.