2024-01-25 13:10:00 ET
Summary
- Based on my estimates for FY25 Free Cash Flow Boeing trades at a roughly 7% FCF yield, representing a sizeable ~22% discount to Airbus.
- I mainly attribute this to a lack of visibility for management's 2025/2026 operational and financial targets in light of ongoing supply chain problems.
- The Alaska Airlines incident has reinforced negative public sentiment toward Boeing which I view as further contributing to the overhang that prior quality issues have created over the stock.
- Nevertheless, the ongoing post-Covid aviation recovery clears the demand side of the equation with record order flow and a $391bn backlog, leaving Boeing's near-term trajectory almost entirely within the scope of its own execution.
- I see a largely equal risk/reward for Boeing shares as an estimated ~10% price upside is balanced by significant execution risk due to ongoing quality issues and Airbus offering a cleaner equity story overall. Initiate at equal-weight (PT $236).
In my view, The Boeing Company (BA) currently is what I estimate is the market's most extreme "show me" story. With still negative profitability in both book profits and cash generation and over $40bn in net debt, Boeing's entire investment proposition hinges on the company being able to ramp up production by ~53% for the 737 and ~150% for the 787, and working through its massive Covid-overhang inventory while simultaneously improving pricing yields in its commercial aircraft business and getting out of costly fixed-price contracts in its defense segment. However, even when giving Boeing the benefit of the doubt to manage achieving those targets in light of still ongoing issues at key suppliers, I view the scenario as largely priced in at normalized multiples. Hence I am equal weight on Boeing shares and see a slightly upward tilted risk/reward balanced out by negative public sentiment and Airbus offering a more attractive investment proposition in terms of visibility, capital flexibility and idiosyncratic risk....
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Boeing: ~20% Discount To Airbus But Quality Issues Keep Me On The Sidelines