Over the last decade, Boeing (NYSE:BA) shares grew to new heights with particular help from the 737 Max programme, launched in 2013, in which Boeing received thousands of new orders from airlines across the globe.
In the eight years that followed, Boeing achieved record deliveries and free cashflow grew consistently year over year. Investors benefitted from both annual dividends and share buybacks on top of share price appreciation.
From 2013 to 2018, Boeing shares rose by 160% from $135 to $350.
Unfortunately, shortcuts taken by management lead to the famous Manoeuvering Characteristics Augmentation System (MCAS) issue resulting in two fatal 737 crashes in 2018/19. Boeing agreed to a settlement of $2.5bn for the airlines and victims’ families. Today Boeing faces different issues particularly supply chain restrictions and recertification of the 737 Max-10.
Boeing CEO David Calhoun told Aviation Week magazine that if the aircraft fails to meet the end-of-year deadline and congress doesn’t extend the 737 Max-10 exemption for installing the pilot warning system, he may cancel the programme. Such an event would be disastrous for Boeing, leading to significant asset write-downs, order book cancellations and customers moving to the likes of Airbus.
Turning point
The string of disappointing news over the last few years has left Boeing shares trading way below the $200 mark. Despite the current headwinds, Boeing’s 737 Max still has a lower fuel consumption in comparison to Airbus’s A320neo (according to Boeing) and the programme still has a 3,400+ order book.
In the event of a recession the backlog is unlikely to be entirely depleted, as production rates would need to exceed 2018 levels (800+ deliveries), which is not a realistic possibility. During the second quarter earnings call this week, management confirmed that they’re in the final stages of restarting 787 deliveries.
With this positive news, there are two key turning points I am focusing on:
- Recertification of 737 Max-10 or congress extending exemption;
- Supply chain issues abating.
Supply issues appear to be improving already as Boeing’s Q2 delivery numbers increased to 121 — of that number 103 were 737 aircraft. Only 86 737 aircraft were delivered in Q1.
Furthermore, airlines continue to place new orders with Boeing despite supply issues and certification uncertainty. If Boeing is successful in certifying 737 Max-10 before year end, the stock could easily exceed the $200 mark as free cashflow would be anticipated to recover to pre-pandemic levels ($12-13bn) in the coming years.
At the current valuation of $85bn ($156 per share), Boeing has room for share-price appreciation as free cashflow is estimated to reach $12bn by FY24 according to Wall Street. This would imply a two-year forward market cap/free cashflow (MC/FCF) of 7x. Historically Boeing usually trades at 18x MC/FCF — in other words, the stock is cheap.
Conclusion
It can be argued Boeing is approaching a turning point in the coming quarters potentially making Boeing a buy for me at $156. Demand is strong as the total order book value of the commercial airline business is $290bn with an additional $60bn in defence contracts waiting to be fulfilled. Two board members have purchased noticeable volumes of shares in the last six months demonstrating a vote of confidence.
I’ve added Boeing shares to my watchlist as I patiently wait on operational developments and investor updates, mainly what is happening with the 737 Max-10.
