RLLCF - Boeing Stock Falls And I Am Buying

2023-09-13 09:19:28 ET

Summary

• Boeing stock has not performed well in August due to issues with Spirit AeroSystems affecting 737 MAX deliveries.
• Despite the stock's performance, there are several reasons to buy Boeing stock, including a backlog of over 5,000 airplanes and improving delivery profiles.
• In August 2023, Boeing booked 45 gross orders and delivered 35 jets, with a book-to-bill ratio of 1.3 and 1, respectively.

I provide monthly overviews for orders, cancellations, deliveries, and other order book mutations for The Boeing Company (BA). While the release of monthly orders and other order news does not always directly impact the stock price, it's important to keep track of orders and deliveries because this provides the smallest blocks of information from which we can assess how things are going for the U.S. jet maker and detect trends early on. The monthly pieces also are the building blocks for the longer term, making a careful study of the numbers extremely meaningful. In this report, I will be analyzing the Boeing orders for August 2023 as well as its deliveries.

Boeing Stock Falls

Boeing stock has not shown appreciable performance in August and not in the year-to-date frame either. That is not a major surprise given the new production issues at Spirit AeroSystems (SPR) that affect the Boeing 737 MAX deliveries and also resulted in Boeing seeing its 2023 commercial airplane deliveries at the low end of its guided ranged, whereas previously there had been some indications that Boeing could end up higher than its guided range. Perhaps the positive here is that Boeing guided conservatively on the delivery numbers, because aiming high and missing the target likely would have resulted in sharper stock price declines.

Why I Bought More Boeing Stock

One may wonder why I would even bother buying a stock that I believe is running ahead of its fundamentals. In my view, it's actually very simple: Any stock price weakness offers an opportunity for the long-term investor. Buying BA stock has been an easier decision for the following reasons:

Boeing has a backlog of over 5,000 airplanes valued at nearly $400 billion. Its net orders are up around 14.7x compared to pre-crisis levels. The delivery profile is improving despite near-term pressures. The return of Boeing 737 MAX airplanes in China is trending strongly paving the way to deliveries and ultimately new orders from Chinese operators. Free cash flow will be used to reduce debt and cut interest costs. Boeing will open a fourth production line for the Boeing 737 MAX, which could see the company pushing single-aisle production toward 80 airplanes a month in the second half of the decade.

While Boeing has a lot to catch up on to justify its stock price, I believe that just the above prospects do offer a compelling reason to position yourself for Boeing's surge in cash flow. There will be hurdles along the way, as we saw in recent months, and the defense business remains rather disappointing. However, the long-term picture remains bright, and you might actually miss the boat (or airplane) if you wait for Boeing to trade at justified prices.

Having watched the market during the pandemic and throughout the MAX crisis, one thing that became extremely clear is that it requires big crises to bring BA stock down, and at this time, I don't see a crisis or combination of crises that could once again bring Boeing down. Macroeconomic factors could become an issue, but even that should not have a huge impact if we were to compare it to the scale of the two other crises that Boeing has faced in recent years.

Boeing Airplane Order News in August 2023

In August, Boeing booked 45 gross orders, marking a sequential decrease of seven orders, with 84% of the order inflow for single-aisle jets and 16% for wide-body airplanes:

Aviation Capital Group ordered 13 Boeing 737 MAX airplanes. SMBC Aviation Capital Group ordered 25 Boeing 737 MAX airplanes. An unidentified customer ordered two Boeing 787-8 airplanes. An unidentified customer ordered five Boeing 787-9 airplanes.

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

BOC Aviation (BCVVF) was identified as the customer for one Boeing 737 MAX. AerCap (AER) selected Rolls-Royce (RYCEF) engines for two Boeing 787-9s. Saudia was identified as the customer for one Boeing 787-10. An unidentified customer cancelled orders for two Boeing 737 MAX aircraft.

During the month, Boeing booked 45 orders valued at $3 billion and two cancellations bringing the orders to 43 airplanes valued $2.9 billion. A year ago, Boeing booked 30 orders and four cancellations, bringing its net orders to 26 units, with a net order value of $2.4 billion. The year-over-year change in order inflow was not driven by any customer in particular but the order for five Dreamliners and 13 Boeing 737 MAX airplanes is what does explain the difference in the order inflow year-over-year.

Year to date, Boeing booked 624 orders and 114 cancellations, bringing its net orders to 510 valued at $43.9 billion. As a reference, last year Boeing booked 446 gross orders and 338 net orders valued at $23 billion. So, year-over-year, Boeing is now exceeding last year's order numbers, which can be attributed to the large order from Air India .

During the month, ASC 606 reduced by 34 units, all of which were for the Boeing 737 MAX. 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. In August, orders were removed from the tally because criteria for the orders to be counted to the backlog had been met. Boeing currently has 625 orders for which the additional criteria are not met.

Boeing Commercial Airplanes Deliveries in August 2023

In August, Boeing delivered 35 jets compared to 43 in the previous month. The U.S. jet maker delivered 22 single-aisle jets and 13 wide-body aircraft with a combined value of $2.9 billion:

Boeing delivered 22 Boeing 737 MAX airplanes. Boeing delivered five Boeing 767s including two base aircraft for the KC-46A tanker and three Boeing 767-300Fs for FedEx Express (FDX). Boeing delivered three Boeing 777Fs. Boeing delivered four Boeing 787s consisting of one -8s, two -9s and two -10s.

The August deliveries were undeniable on the soft side and that was driven by the production issues at Boeing's supplier Spirit AeroSystems. The wide body delivery flow as actually strong but it was offset by the inability to deliver Boeing 737 MAX airplanes as scheduled.

Compared to last year, August delivery numbers remained stable at 35 airplanes, while the value of those deliveries increased from $2.5 billion to $2.9 billion, displaying higher volume and a favorable delivery mix. Single-aisle deliveries decreased by six units while wide-body deliveries increased by six units, primarily led by higher Boeing 787 and Boeing 777 deliveries. Year-to-date, Boeing delivered 344 airplanes valued $24.7 billion compared to 277 deliveries valued $18.2 billion last year marking an increase in deliveries of 24% and a 36% increase in delivery value.

The book-to-bill ratio for the month was 1.3 in terms of orders and 1 in terms of value. The book-to-bill ratio for the year is looking extremely strong, with a ratio of 1.8 measured by units and 2.2 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 400 to 450 Boeing 737 deliveries and around 70-80 Boeing 787 deliveries. Overall, I'm expecting around 530 deliveries which is lower than the 535-590 deliveries I previously expected.

How Do Boeing Airplane Deliveries Compare To Airbus?

Boeing delivered 35 airplanes to customers in August, while Airbus (EADSF) (EADSY) delivered 52 airplanes. Year-to-date, Boeing delivered 344 jets compared to 433 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, the U.S. jet maker is trailing its European rival by the end of the second quarter. What, however, should be noted is that Boeing is seeing better growth numbers in deliveries, up 24% compared to 14% for Airbus.

Conclusion: Boeing Stock Is A Buy With Eye On The Future

Boeing's orders are nice to have at this point as they underline the demand for commercial airplanes which provides a negotiation strength in the jet maker's favor. The big orders won this year are providing Boeing with a skyline against which it can compile a production schedule and potential rate increases.

However, Boeing's problem despite delivering 24% more airplanes is that it is not hitting the desired levels to be profitable in the commercial airplane business. The problems at Spirit AeroSystems have persistent this year and that is a shame for Boeing as the company would otherwise be able to produce significantly more airplanes but in more than one way given Spirit AeroSystems' past as part of Boeing the issues partially are of Boeing's own making. This year is going to be a somewhat disappointing year in terms of deliveries. Until now, Boeing has been able to show superior growth rates in deliveries compared to competitor Airbus and while I do expect that to be the case by the end of the year as well those growth rates are likely going to be closer than they are now.

By 2024, The Boeing Company free cash flow should have more than doubled compared to the 2022 free cash flow. This free cash flow should enable Boeing to significantly deleverage, which adds to the long-term appeal of the stock. So, in the short term, Boeing stock likely is more a hold, but I would say that the long-term drivers are what make the stock attractive - and that also means that at present, you cannot buy Boeing stock at a discount.

What we're already seeing is strong demand for commercial airplanes and a strong increase in delivery volumes. The strong demand environment is likely going to persist this year and possibly into next year as other growth drivers come back online for Boeing. As a result, I continue to add modestly to my Boeing position recognizing the company's stock price is running ahead of its fundamental recovery but over the long term even a slightly overpriced entry point will be rewarding. In case there will be a market sell-off, I would add more aggressively to my Boeing position as it would allow to add to the position at a lower or even no premium.

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