SINGY - Boeing: The Buy Vibes

2023-07-13 13:06:54 ET

Summary

• Boeing customers bought more than 300 airplanes in July.
• Deliveries are increasing, which is a positive for cash generation.
• Boeing's expanding backlog provides significant upside to production rates.

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 June 2023 as well as its deliveries.

Boeing Stock Performance

In June, Boeing stock underperformed the broader markets. While it can be difficult to figure out whether there were any company or industry specific items that pushed stock prices higher or lower, a glance on the Boeing stock performance chart rather quickly revealed that the stock performance during the Paris Airshow which I analyzed in a separate report. It seems that both Boeing and Airbus did not have the usual stock price reaction to order announcements because many of the orders were already anticipated. Year to date, Boeing stock also has underperformed since the Boeing 737 MAX delivery delays became apparent.

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 14x compared to pre-crisis levels.
• The delivery profile is improving.
• 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.

Results obviously fluctuate until a position is closed out, but my buy at the $201 level already has outperformed, with a 5.85% return compared to 2.85% for the broader markets.

Boeing June 2023 Airplane Order News

In June, Boeing booked 304 gross orders, marking a sequential increase of 235 orders, with 70% of the order inflow for single-aisle jets and 30% for wide-body airplanes:

• Paris Airshow Order: Air India ordered 190 Boeing 737 MAX airplanes, 20 Boeing 787-9s and 10 Boeing 777-9 airplanes.
• Paris Airshow Order: Air Lease Corporation ( AL ) ordered two Boeing 787-9s.
• Paris Airshow Order: Akasa Air ordered 4 Boeing 737 MAX airplanes.
• Emirates ordered 16 Boeing 777X airplanes.
• Riyadh Air firmed its order for 39 Boeing 789-9
• TUI Travel PLC ordered five Boeing 737 MAX airplanes.
• Turkmenhowayollary Agency ordered five Boeing 737 MAX Airplanes.
• An unidentified customer ordered 10 Boeing 737 MAX airplanes.
• An unidentified customer ordered 4 Boeing 777F airplanes.

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

• Emirates cancelled orders for 16 Boeing 777X airplanes.
• AerCap selected Rolls-Royce ( RYCEF ) as the engine supplier for three Boeing 787-9s.
• Air France-KLM ( AFRAF ) was identified as the customer for one Boeing 787-10.
• Air Lease Corporation selected General Electric ( GE ) as the engine supplier for three Boeing 787-9s.
• Air Niugini selected Rolls Royce as the engine supplier for two Boeing 787-8s.
• An unidentified customer selected General Electric as the engine supplier for two Boeing 787-8s.
• American Airlines (AAL) took over a delivery slot for one Boeing 787-8 from Boeing Capital Corporation.
• As announced on the Paris Airshow, Avolon was identified as the customer for 40 Boeing 737 MAX airplanes.
• China Airlines was identified as the customer for six Boeing 787 airplanes including a conversion of four Boeing 787-9s to the -10 variant.
• China Postal Airlines was identified as the customer for one Boeing 777F.
• Turkish Airlines was identified as the customer for five Boeing 787-9s.
• Singapore Airlines ( SINGY ) was identified as the customer for five Boeing 787-10s.

Boeing saw an uptick in its order numbers in June driven by the order from Air India. Boeing’s June numbers do not compare favorably to Airbus , but that's almost solely driven by a single 500-unit order from IndiGo. What was noteworthy is that the Boeing 787 platform gathered 60 orders and the order from Riyadh Air for 39 airplanes was finalized during the month. Boeing flew an airplane in Riyadh Air colors to the Paris Airshow, but somehow there was no announcement during the airshow of the order being finalized. Either way, with 60 gross orders logged for the Boeing 787 and 213 Boeing 737 MAX orders we are seeing how Boeing is constructing the skyline that will allow the jet maker to sustainably increase production on these key programs. Interesting was the Boeing 777X cancellations from Emirates which was accompanied by an order of 16 units as the company swapped orders for the Boeing 777-8 to the Boeing 777-9 and could serve as an indication that Boeing and its 777X customers are now more intensively working on delivery timelines. The cancellation from Emirates, which also was offset by an order, already was anticipated in our evoX Aircraft Sales Monitor available to subscribers of The Aerospace Forum.

During the month, Boeing booked 304 orders valued at $25.4 billion, while it scrapped 16 orders valued at $2.9 billion from the books, bringing the net orders to 288 orders with a value of $22.5 billion. A year ago, Boeing booked 50 orders and 35 cancellations, bringing its net orders to 15 units, with a net order value of $0.3 billion. The year-over-year change in order inflow and value is driven by the timing of the Air India and Riyadh Air orders and the favorable order mix.

Year to date, Boeing booked 527 orders and 112 cancellations, bringing its net orders to 415 valued at $34.3 billion. As a reference, last year Boeing booked 286 gross orders and 186 net orders valued at $13.9 billion. So, year-over-year, Boeing is now exceeding last year's order numbers and value driven by the Air India order.

During the month, ASC 606 reduced by 17 units, 43 of which were for the Boeing 777X while the MAX adjustments went up by one unit and the Boeing 787 adjustments went up by 25 units. Boeing does not specify which operators are behind these adjustments, but we're tracking which airlines and customers are potentially behind these adjustments. In June, we saw improvement on the Boeing 777 program which was driven by the Emirates order being booked out and booked in and further improvement on the backlog amongst Boeing 777X customers. On the Boeing 787 program, it seems that Emirates might be stepping away from the Boeing 787 for now while Turkish Airlines has a more firm order now.

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 700 orders for which the additional criteria are not met.

Boeing June 2023 Aircraft Delivery News

In June, Boeing delivered 60 jets compared to 50 in the previous month. The U.S. jet maker delivered 49 single-aisle jets and 11 wide-body aircraft with a combined value of $4 billion:

• Boeing delivered 49 Boeing 737 airplanes, including 48 Boeing 737 MAX airplanes and one Boeing P-8A.
• Boeing delivered four Boeing 767s including one base aircraft for the KC-46A tanker.
• Boeing delivered one Boeing 777F.
• Boeing delivered six Boeing 787s consisting of two -8s, two -9s and two -10s.

Boeing deliveries were strong during the month with 49 Boeing 737 deliveries marking a >35% improvement. This gives a strong indication that Boeing is receiving more conforming fuselages, and that inspections on already-built jets are progressing well. However, it also should be kept in mind that the quarter-end push also is reflected in these numbers, so perhaps the July figures will be a better indication on where Boeing stands with the ramp up. Either way, Boeing 737 MAX deliveries are up 16.6% to date and that includes the temporary delivery slowdown from earlier this year.

Compared to last year, June delivery numbers increased by nine units from 51 deliveries to 60 deliveries, while the value of those deliveries increased from $3.2 billion to $4 billion, displaying higher volume and a favorable delivery mix. Single-aisle deliveries increased by five units while wide-body deliveries increased by four, led by higher Boeing 787 deliveries partially offset by lower Boeing 777 deliveries. Year-to-date, Boeing delivered 266 airplanes valued $18.6 billion compared to 216 deliveries valued $14.2 billion last year marking a 23% increase in deliveries and a 30% increase in delivery value.

The book-to-bill ratio for the month was 5.1 in terms of orders and 6.3 in terms of value, while the cancellation rate was 5.3% measured against the order inflow, and 0.3% when measured against the backlog. The book-to-bill ratio for the year is looking extremely strong, with a ratio of 2 measured by units and 2.3 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 535-595 deliveries.

How Do Boeing Airplane Deliveries Compare To Airbus?

Boeing delivered 60 airplanes to customers in June, while Airbus delivered 72 airplanes. In the first half of 2023, Boeing delivered 266 jets compared to 316 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 30% compared to 7% for Airbus.

Conclusion: Boeing Stock Is A Buy For the Future

Boeing’s June orders were strong but that was mostly driven by the Air India order. The Paris Airshow in my view was somewhat underwhelming. All with all, we do see that order numbers are up year-over-year and the Boeing 737 MAX and Boeing 787 programs which generate the bulk of Boeing’s commercial airplane cash flow are seeing good order inflow. Those orders go into Boeing’s skyline to generate production schedules and determine the need for future production hikes. The way the backlog is now, from demand side sufficient backlog exists to increase production as planned and even beyond that which obviously is a plus for Boeing’s ability to generate cash over the long-term and reduce its debt balance.

By 2024, the free cash flow should have more than doubled compared to the 2022 free cash flow and be positive 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 currently already seeing is strong demand for commercial airplanes and a strong increase in delivery volumes. Seeking Alpha authors have a Hold rating on the stock, while Wall Street analysts have a Buy rating .

While investors might not be wrong for softening their bullish view on Boeing for the short term, I do think that if you focus on what Boeing might or might not deliver in the second quarter or this year, you will eventually miss the bigger picture of improving delivery numbers and fundamentals. Challenges remain in all time frames, but the trends and outlooks are positive, and they're bigger positives than the near-term pressures Boeing faces.

Valuing Boeing at 16 to 17 times free cash flow generation gives a $265 to $280 price target based on the outlined trajectory toward the mid-decade targets. So, Boeing is certainly not cheap, but around 30% upside does exist as it executes on its targets. With the industry and stock market being forward looking, that price target could be hit earlier than mid-decade on positive momentum for Boeing stock.

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