EADSY - Boeing: 69 Billion Reasons To Buy

2023-11-27 12:00:00 ET

Summary

• Boeing stock underperforms due to supply chain and quality issues, but there are bright spots on the horizon.
• Boeing has a strong backlog of orders and a favorable demand environment for commercial airplanes.
• October order inflow decreased year-on-year, but year-to-date numbers show significantly higher order inflow, validating my view of a stronger order environment.

Boeing (BA) had quite a good order inflow during the Dubai Airshow in November. However, this report will not detail the airshow order inflow but will be about the October order and delivery numbers for Boeing which were announced during the airshow. From the monthly order and delivery numbers we get some insight in how the company is progressing in terms of orders but more importantly in terms of deliveries. As this report covers the October numbers, it is important to keep in mind that any orders announced during the Dubai Airshow are not part of this overview.

Boeing Stock Falls With The Market

Boeing stock has been under some pressure this year as the company has been facing a disappointing ramp up profile for Boeing 737 MAX deliveries due to supply chain and quality issues at supplier Spirit AeroSystems. This has resulted in the stock underperforming year-to-date. However, while the stock lost value in October, we do see that the decline was in line with the market. So, it was not a strong month for the stock but also not a bad one and I believe that as we see more bright spots on the horizon the stock will appreciate accordingly. Worth to note is that the company has to deliver, because its current valuation from EV/EBITDA perspective runs ahead significantly of the balance sheet recovery.

Why I Continue To Buy More Boeing Stock

The results we see now at Boeing are really not worth your investment, yet I am currently accumulating Boeing shares. One may wonder why and that is also why I have been explaining my reasons to keep adding stocks in recent reports covering the monthly order and delivery overview. Those reasons are actually very simple and some elements that I previously have marked as reasons to buy the stock did materialize. The overarching reason is that Boeing’s business is built on strong long-term demand trends. Going into more detail, the following reasons to buy the stock are:

• A commercial airplane backlog of nearly 6,000 airplanes valued over $440 billion.
• A strong demand environment for commercial airplanes.
• Improving delivery profiles despite the near-term challenges faced.
• The Boeing 737 MAX return to service of the installed base in China has been completed, which was a major milestone I described as a prerequisite for new deliveries and cash flows to come back alive.
• Boeing sees momentum for wide body as well as narrow body sales that will drive down its net debt position and help the company deleverage the balance sheet.

Boeing Airplane Order News in October 2023

Sequentially, Boeing orders decreased from 224 to 123 with 111 single aisle orders and 12 wide body orders valued $7.7 billion:

• Southwest Airlines ( LUV ) finalized an order for 111 Boeing 737 MAX 7 airplanes.
• British Airways ( ICAGY ) ordered six Boeing 787-10s.
• One or more unidentified customers ordered two Boeing 777Fs.
• One or more unidentified customers ordered four Boeing 787-9s.

During the month, the following changes were made to the order book:

• Aerolineas Argentinas canceled an order for one Boeing 737 MAX.
• An unidentified customer canceled an order for five Boeing 737 MAX airplanes.
• Royal Jordanian converted an order for two Boeing 787-8s to two Boeing 787-9s.
• TAAG Angola Airlines was identified as the customer for two Boeing 787-9s and two Boeing 787-10s.
• Saudia was identified as the customer for one Boeing 787-10.
• Southwest Airlines was identified as the customer for 60 Boeing 737 MAX airplanes.

Boeing booked 123 gross orders during the month valued $7.7 billion with a net tally of 117 orders valued $7.3 billion compared to 122 net orders valued $7.9 billion in the same month last year. While order inflow did fall year-on-year on all metrics, it certainly was not a bad month as we saw a big order from Southwest Airlines and continued order inflow for the Boeing 787. In some way you could even say we are in a strong environment for commercial airplane orders now for well over a year and while there is a year-over-year decline order inflow has had a lot of momentum.

Year-to-date, Boeing has booked 971 orders and 130 cancellations bringing the net orders to 841 airplanes valued $68.9 billion. In the comparable period last year, Boeing booked 550 net orders valued $40.1 billion. So, looking at a single month shows order inflow is down compared to last year but the year-to-date numbers show significantly higher order inflow validating my view that the order environment remains strong and even has strengthened. The increase can be attributed to the large 220-unit order from Air India earlier this year as well as the United Airlines ( UAL ) order for 50 Dreamliners.

During the month, ASC 606 adjustments increased by 16 units: 26 for the Boeing 737 MAX offset by three for the Boeing 777 and seven for the Boeing 787 program. ASC 606 adjustments adjust for orders for which a purchase agreement exists but additional requirements beyond the existence of a purchase contract are not met. An increase means that more orders are doubtful, while a decrease means that the additional requirements are met or the order that was considered doubtful was cancelled. Boeing currently has 627 orders for which the additional criteria are not met.

Boeing Commercial Airplane Deliveries in October 2023

In October, deliveries ticked up seven units to 34 consisting of 19 single aisle deliveries and 14 wide body deliveries valued $3.1 billion:

• 19 Boeing 737 airplanes were delivered including 18 Boeing 737 MAX airplanes and one P-8A Poseidon.
• Boeing delivered three Boeing 767s consisting of three baseline airplanes for tanker configuration and three freighters.
• Boeing delivered three Boeing 777Fs.
• Boeing delivered six Boeing 787s consisting equally split between the -9 and -10 variant.

Single aisle deliveries remain slow but were up four units during the month while Boeing 767 deliveries were up six units and Boeing 777 deliveries were up one unit offset by a 4 unit decrease in Dreamliner deliveries. In the same month last year, Boeing delivered 35 airplanes valued $2.9 billion. So, we see a small year-on-year reduction in deliveries but a positive offset on value driven by a favorable delivery mix as single aisle deliveries decreased four units while wide body deliveries increased three units.

Looking at the year-to-date figures, Boeing is still ahead having delivered 405 airplanes valued $30.4 billion compared to 363 airplanes valued $25 billion marking a 11.5% improvement in delivery volumes and a 22% increase in delivery value. Those are nice numbers, but not anywhere close to what was expected at the start of the year.

The book-to-bill ratio for the month was 3.6 in terms of orders and 2.4 in terms of value. The book-to-bill ratio for the year is looking extremely strong, with a ratio of 2.4 measured by units and 2.6 measured by value. As I noted previously, we're looking for book-to-bill ratios higher than one, but even when that's achieved, these ratios should also be placed in context, as we see strong demand but significant pressure from the supply side to translate orders into deliveries.

What Is Boeing's Delivery Target For 2023?

For 2023, Boeing has not provided an official delivery target, but the company expects 375 to 400 Boeing 737 deliveries and around 70-80 Boeing 787 deliveries. Overall, I'm expecting around 500-520 deliveries, which is lower than the 535-590 deliveries I previously expected.

How Do Boeing Airplane Deliveries Compare To Airbus?

Boeing delivered 34 airplanes to customers in October, while Airbus ( EADSF , EADSY ) delivered 71 airplanes. Year-to-date, Boeing delivered 405 jets compared to 559 for Airbus. Boeing and Airbus have been delivering roughly the same number of airplanes in the first quarter, but due to the issues with the Boeing 737 MAX production, the U.S. jet maker is trailing its European rival since the end of the second quarter. Previously, Boeing could still take some pride in having the better relative growth in delivery numbers, but that is also fading at this stage, as deliveries are up 12% compared to 12.5% for Airbus.

Conclusion: Don’t Buy Boeing For Current Performance

Boeing is not a name that you would want to buy for its current delivery performance. Indeed, the delivery volumes are up but not in a way that warrants its current valuation. Boeing is a buy for the longer-term as it grows its delivery volumes next year and into mid-decade and the positive I am seeing now is that the orders supporting those future increases in deliveries are there. So, this is a matter of supply chain health and quality improving allowing Boeing to capitalize on demand which will be reflected in it is free cash flow statements going forward and drive a significant reduction in inventories as well as debt or net debt.

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