2023-05-03 16:09:09 ET
Summary
- The Boeing Company’s recent decent earnings results indicate that the 737 MAX fiasco is now finally overshadowed by growth.
- The revival of air travel along with the increase in orders from emerging economies could help Boeing secure a prosperous future.
- Geopolitical risks are the only thing that can potentially kill Boeing’s growth story at this stage.
Last week, The Boeing Company ( BA ) reported decent earnings results for Q1 which indicate that the 737 MAX fiasco is mostly over, and the company has an opportunity to return to growth mode thanks to the increased demand for its planes due to the revival of air travel. At the end of March, Boeing already had a backlog of over $400 billion thanks to the recent major orders from Indian and Gulf airlines, which could help the business generate even greater returns in the following quarters and create additional shareholder value along the way. While there are still risks regarding dealing with China due to geopolitical reasons, the company’s management might nevertheless execute a flawless comeback if the challenging macroeconomic environment won’t severely affect the air travel industry in the foreseeable future.
Demand Is Back
Boeing’s Q1 earnings results that were published last week showed that its business generated $17.9 billion in revenues during the period, which is up 27.9% Y/Y and above the street forecasts by $340 million. At the same time, the company delivered 130 airplanes during the period and secured 107 new net orders that brought the worth of its backlog to $411 billion at the end of March. On top of that, even though Boeing didn’t generate any cash in Q1 as its operating cash flow was negative while its free cash flow ("FCF") was -$0.8 billion, it was still better than the -$3.6 billion in FCF for the same period a year ago. Considering that the management nevertheless aims to have a positive FCF in FY23 and is already on track to improve its performance in the following quarters, it’s safe to say that the recovery from the 737 MAX fiasco is in full swing at this stage.
One of the main reasons why Boeing has all the chances to improve its financials in the second half of the year is the gradual recovery of the air travel market from the Covid-19 pandemic which has already increased the demand for new planes by the airlines this year. The latest available data shows that the global flight seat capacity is only 3.2% below where it was back in 2019 and above 20% last year. As such, it’s safe to say that the market is likely to fully recover from the pandemic later this year. This should be considered as a major bullish development for Boeing, which plans to deliver 400 to 450 737 planes this year and increase its production to 38 planes per month.
Two major markets which could help Boeing significantly improve its performance are India and Saudi Arabia. In the past, I’ve already noted that the revival of Air India under a new ownership along with the rise of the Indian aviation market could help Boeing minimize geopolitical risks associated with its business in China. During the recent earnings call , Boeing management already stated that it has received a commitment from Air India to purchase 190 737 MAX, 20 787s, and 10 777Xs. At the same time, there are talks with another Indian airliner IndiGo to sign another record deal that could help Boeing accelerate the pace of its recovery.
In addition to all of that, Boeing has also recently signed a ~$37 billion deal with Saudi Arabia’s newly established airline Riyadh Air to deliver 121 of its 787 Dreamliner jets in the following years. As Saudi Arabia seeks to redefine itself and decrease its exposure to the oil market by expanding its tourism sector, Boeing would likely be able to benefit from this development for years to come.
With all of that in mind, it seems that Boeing is finally able to gradually recover from the 737 MAX fiasco and is also on track to significantly improve its performance in FY23 and beyond. As such, the updated discounted cash flow ("DCF") model below assumes that in the next couple of years, Boeing’s business would be able to gain more ground, and as such the revenue growth rate along with EBIT expectations below are mostly in-line with the street consensus. The tax rate in the model is 21% which is the standard corporate rate in the U.S., while D&A along with CapEx as percentages of revenues are averages of the previous few years. The model also assumes that a change in net working capital will be positive in the following years as was the case in Q1 , while WAAC and terminal growth rates are 9% and 3%, respectively. As a result, the model assumes that Boeing will be able to generate close to $5 billion in FCF in FY23 and ~$10 billion in annual FCF in FY25 and FY26, which is in-line with the management’s current forecast .
Boeing's DCF Model (Historical Data: Seeking Alpha, Assumptions: Author)
This DCF model shows that Boeing’s enterprise value is $152 billion while its fair value is $198.12 per share, which is slightly below the current market price, but the difference is insignificant at the time of this writing.
Boeing's DCF Model (Historical Data: Seeking Alpha, Assumptions: Author)
Considering that Boeing’s recent results show that the 737 MAX fiasco is behind it while the demand for its civil and military products is on the rise, there are reasons to believe that the company would be able to outpace forecasts. If that’s the case, then it’ll lead to the upside revision of its fair value calculation.
The consensus on the street currently is that Boeing’s fair value is $232.6 per share, above my calculations and above the current market price. If Boeing’s management would be able to continue to beat expectations, then there’s a case to be made that the company’s shares would be able to reach such levels in the following quarters without a problem.
China Is The Dark Horse
China is the only major dark horse in Boeing’s bullish thesis. On the one hand, the country has recently allowed the airlines to operate Boeing’s 737 MAX jets in its airspace after it initially banned them in 2019 after a major incident. However, despite the newly issued clearance, Boeing hasn’t delivered a single commercial passenger plane to any of the Chinese airlines in recent years due to the worsening of the Sino-American relations and the ongoing trade war. Most of the 737 MAXs that Boeing manufactured for its Chinese customers are still sitting in its inventory to this day, and only some of them were redesigned and sold to customers from other countries.
On top of that, there’s a serious risk that Boeing won’t be able to return to its leadership position in the Chinese market due to the resurgence of domestic alternatives. Just recently, Hainan Airlines became the second major airline to make a commitment to purchase 100 Chinese-made C919 and ARJ21 commercial jets just months after its peer China Eastern did the same thing.
In addition to that, after the controversial visit of French President Macron to China in April, the French-based manufacturer Airbus (EADSF, EADSY) announced that it has signed a deal to sell 160 of its jets to Chinese airlines, and at the same time, it plans to open another final-assembly in the country to double its manufacturing capacity there.
Considering all of this and the fact that Boeing’s defense CEO is already sanctioned by Beijing, while the upcoming American restrictions on investments in China are about to be revealed later this month, it becomes obvious that the company is unlikely to make a comeback in China anytime soon. The good news, though, is that the forecasted growth of the Indian aviation market along with the expansion of Gulf airlines could minimize the Chinese-related downsides in the following years.
The Bottom Line
The Boeing Company ’s latest earnings results indicate that the worst for the company is behind it. The revival of the growth story thanks to the return of air travel in a post-Covid-19 era along with the increase in orders from emerging economies shows that the demand for the company’s planes is coming back. The only thing that can kill Boeing’s growth story is the increase of geopolitical risks due to the worsening of the Sino-American relations that could have a major negative impact on the global economy and the whole air travel industry. However, thanks to the decent backlog of orders and the fact that the American military-industrial complex relies on The Boeing Company to manufacture weapons systems, it’s safe to assume that, even in the worst-case scenario, the company is unlikely to go under anytime soon.
For further details see:
Boeing: Major Turnaround Starts Now