FDX - Boeing: Wait For Stock Crash Or Buy?

2023-08-09 16:21:25 ET

Summary

• The Boeing Company stock outperforms in July due to positive financial results and strong free cash flow performance.
• Reasons to buy Boeing stock include a backlog of over 5,000 airplanes, increasing net orders, improving delivery profile, and strong demand in China.
• Boeing booked 52 gross orders in July, with 23% for single-aisle jets and 77% for wide-body airplanes, and delivered 43 jets.

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 July 2023 as well as its deliveries.

Boeing Stock Outperforms

In July, Boeing saw its stock outperform the broader markets significantly. The reason for that was the financial results that Boeing presented towards the end of the month. Overall, I deemed the results analyzed in a separate report to be mixed but the free cash flow performance was a positive surprise to investors. Year-to-date, the stock is now once again outperforming the broader market despite earlier issues with the Boeing 737 MAX and defense & space programs remaining troubled.

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.

Boeing Airplane Order News in July 2023

In July, Boeing booked 52 gross orders, marking a sequential decrease of 252 orders, with 23% of the order inflow for single-aisle jets and 77% for wide-body airplanes:

• Luxair ordered four Boeing 737 MAX airplanes.
• Saudia ordered 18 Boeing 787-9s and 21 Boeing 787-10s.
• An unidentified customer ordered eight Boeing 737 MAX airplanes.
• An unidentified customer ordered one Boeing 777F.

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.
• CES Leasing Corporation was identified as the customer for one Boeing 777F.
• Japan Airlines ( JAPSY ) was identified as the customer for one Boeing 787-8.

In July, the orders numbers contracted sequentially but this was to be expected as in June order inflow was driven by Paris Airshow orders. The July orders contained the already expected order from Saudia, which was announced in March.

During the month, Boeing booked 52 orders valued at $6.8 billion. There were no cancellations processed during the month. A year ago, Boeing booked 130 orders and four cancellations, bringing its net orders to 126 units, with a net order value of $7.1 billion. The year-over-year change in order inflow and value is driven by the timing of airshows as the Paris Airshow and the Farnborough Airshow alternate every year.

Year to date, Boeing booked 579 orders and 112 cancellations, bringing its net orders to 467 valued at $41 billion. As a reference, last year Boeing booked 416 gross orders and 312 net orders valued at $20.5 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 40 units, 42 of which were for the Boeing 737 MAX while Boeing 787 adjustments increased by two units. 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 Aircraft Delivery News in July 2023

In July, Boeing delivered 43 jets compared to 60 in the previous month. The U.S. jet maker delivered 33 single-aisle jets and ten wide-body aircraft with a combined value of $3.2 billion:

• Boeing delivered 33 Boeing 737 airplanes, including 32 Boeing 737 MAX airplanes and one Boeing P-8A.
• Boeing delivered three Boeing 767s including two base aircraft for the KC-46A tanker and one Boeing 767-300F for FedEx Express ( FDX ).
• Boeing delivered three Boeing 777Fs.
• Boeing delivered four Boeing 787s consisting of one -8s, three -9s but no -10s.

As expected, the July deliveries showed a sequential decline. As the stress on the aerospace supply remains high and has also been high prior to the pandemic, we have seen deliveries peak towards quarter-end and then fall back in the subsequent month. July is such a month. As a results, I wouldn't want to draw any major conclusions from the decline in delivery numbers. Boeing 737 MAX deliveries are up 19% to date and that includes the temporary delivery slowdown from earlier this year.

Compared to last year, July delivery numbers increased by 17 units from 26 deliveries to 43 deliveries, while the value of those deliveries increased from $1.5 billion to $3.2 billion, displaying higher volume and a favorable delivery mix. Single-aisle deliveries increased by ten units while wide-body deliveries increased by seven, primarily led by higher Boeing 787 and Boeing 777 deliveries. Year-to-date, Boeing delivered 309 airplanes valued $21.8 billion compared to 242 deliveries valued $15.7 billion last year marking an increase in deliveries of 30% and a nearly 40% increase in delivery value.

The book-to-bill ratio for the month was 1.2 in terms of orders and 2.1 in terms of value. The book-to-bill ratio for the year is looking extremely strong, with a ratio of 1.9 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 43 airplanes to customers in July, while Airbus delivered 65 airplanes. Year-to-date, Boeing delivered 309 jets compared to 381 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 12% for Airbus.

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

Boeing's July orders did not contain huge surprises, but did include the big order from Saudia for the Dreamliner that was announced earlier this year. While Boeing has not impressed much during the Paris Airshow in June and its July order inflow is not impressive either, the continued order inflow we have seen for the Boeing 737 MAX and Boeing 787 are important for Boeing's projected rate increases on these programs. The big orders that Boeing books now go into Boeing's skyline to generate production schedules and determine the need for future production hikes. The way the backlog stands 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.

Deliveries have yet to reach a stable rate, but even without the desired stability and an earlier slowdown in the Boeing 737 MAX deliveries we do see significant improvement in the year-over-year delivery numbers and this should also feather in positively into the financial performance this year and beyond as deliveries are expected to increase further.

By 2024, The Boeing Company 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. 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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