EADSY - Boeing: The Gift Has Finally Arrived (Rating Upgrade)

2023-09-22 16:00:34 ET

Summary

• Boeing stock has underperformed the S&P 500 since January 2023 and is on the verge of entering a bear market.
• Recent disclosures and lower delivery expectations have spooked investors and affected confidence in the company.
• Despite challenges, Boeing remains confident in its long-term recovery and sees potential growth in the Chinese market.
• The moment of reckoning for greedy buyers has arrived, as sellers digested all the gains made in the July 2023 surge. That said, BA has entered oversold zones.
• I argue why it's finally time for me to turn bullish as the market turns pessimistic again. I love it when there's blood in the street.

The Boeing Company ( BA ) investors who chased its recent momentum surge toward its August highs have finally received their moment of reckoning. I have stressed the need to be increasingly cautious for BA investors who didn't add in 2022 when it was priced at peak pessimism.

As such, BA has significantly underperformed the S&P 500 ( SPX ) since January 2023, even as the market pulled back markedly this month. BA suffered a worse plunge, declining nearly 18% from its August highs through this week's lows, on the verge of entering a bear market.

As such, BA revisited lows last seen in late May 2023, as dip buyers likely took profits. Aerospace and airline stocks have gotten hammered over the past two months. The spate of disclosures related to companies like RTX Corporation ( RTX ) and Spirit AeroSystems ( SPR ) have likely affected investor confidence markedly.

Furthermore, Boeing's recent disclosure at an early September conference that it anticipates deliveries for its 737 program to be at the lower end of its full-year guidance of between 400 and 450 likely spooked investors further. Notwithstanding the company's confidence in maintaining its full-year free cash flow or FCF guidance of between $3B and $5B, investors likely anticipate higher execution risks to reach that outlook.

However, Boeing reaffirmed its $10B FCF commitment for the FY25/26 timeframe, suggesting its recovery remains on track. The company is also confident about the tailwinds from China's recovery, with the nearly full-service resumption of the MAX fleet (97%).

Boeing recently raised its long-term forecast on the significant demand outlook for the Chinese market, which is expected to outpace the US market substantially. Accordingly, Boeing " anticipates that China will experience annual average growth of more than 11% in commercial air travel for the next 20 years," relative to North America's 4% annual growth.

However, Boeing's planning assumptions suggest that China's tailwinds are expected to be realized "towards the end of the decade," suggesting investors should not expect marked near- to medium-term adjustments.

With BA still early in its recovery phase, I'm not surprised with its "F" valuation grade, suggesting it is overvalued compared to peers.

With the steep decline, BA's FY25 adjusted EBITDA of 14x implies a slight undervaluation relative to its 10Y average of 15.9x. As such, I assessed that it is likely reflecting higher execution risks on its medium-term outlook, given the recent headwinds over the past two months.

I believe the caution is justified, as Airbus ( EADSF ) stock is priced at a forward EBITDA multiple of just 10.1x. Therefore, it's apparent that the market is still allowing Boeing the opportunity to justify its valuation at the current levels, even as the near-term headwinds intensify.

BA topped out in early August at the $243 level, forming an astute bull trap (false upside breakout) following the remarkable surge in late July.

As such, the nearly 20% decline from its August highs has taken out all that momentum spike and more, allowing the market to digest the near-term froth in BA.

With BA dropping into the oversold zone on its weekly chart, it has entered the $190-$200 support zone, which previously undergirded BA's consolidation from its March 2023 lows.

While I anticipate buyers to remain cautious in the near term as I have not gleaned a validated bullish reversal, I'm ready to turn more constructive on BA. I expect BA's critical support zone to hold robustly, as the next critical drop zone points to the $120 level, which seems highly unlikely.

Furthermore, BA's nascent medium-term uptrend should be bolstered by its 50-week moving average or MA (blue line) if buyers are confident about management's execution.

Notwithstanding my optimism, more conservative investors should remain cautious until they observe a validated bullish reversal, corroborating the robustness of the current support zone.

Rating: Upgraded to Buy.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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