Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
First, it looked like Boeing's (NYSE: BA) 737 MAX might return to flight in June.
Then, July seemed more likely.
No? Well, how about 2020?
The trouble with Boeing's 737 MAX
It seems the longer we wait for Boeing to get its act together, the farther away the date for 737 MAX's return to service gets. Over the weekend, The Wall Street Journal reported that as the list of "safety analyses" demanded by FAA engineers, regulators, and even Boeing itself has expanded "to cover a growing list of issues," it's now looking "unlikely [the 737 MAX will] be ready to carry passengers again until 2020."
The problems that began with fatal crashes of Boeing 737 MAX 8 airplanes off the coast of Indonesia and in Ethiopia, necessitating upgrades to the aircraft's MCAS software, have expanded. The laundry list now includes examinations of flight training simulators, emergency recovery procedures, and even of electronic components that go into the 737 -- and this list could continue to grow as time rolls by.
This morning, two name-brand analysts cut their price targets for the stock, with Citigroup reducing its target to $430 a share, and Credit Suisse going a bit lower at $427 (as reported today by StreetInsider.com).
Put your seats back, lower your trays, and unbuckle if you want to -- it's going to be a long ride
Despite cutting targets, however, both Citi and Credit Suisse insist that Boeing stock remains a buy over the long term. Credit Suisse's analysis is particularly instructive:
"Barring an unforeseen catastrophe, we believe the MAX will be recertified at some point ... which should presage a return to normal production and delivery rates," says the Swiss megabanker. And that's what Credit Suisse thinks investors should focus on -- how Boeing stock will look at some (perhaps distant) date once all of the turbulence surrounding the 737 MAX has subsided, and things get back to normal for the company.
The analyst doesn't say when precisely the 737 MAX will be recertified. In fact, perhaps hoping to dissuade investors from getting overly optimistic (and then getting shaken out of the stock when that optimism is disabused), Credit Suisse trains its binoculars far out, examining how the company might look "in the 2022 timeframe."
"Though the timeline has been extended, normalized free cash should plateau around $32-37 per share" in 2022, explains the analyst. And if investors buy Boeing stock today and hold until things settle down, then by 2022 or thereabouts, Credit Suisse believes these investors will be rewarded.
Working the numbers
So how does this work? To keep the math simple, say Boeing manages to get its 737 MAX problems behind it later this year, resumes flying sometime in 2020, and generates $36 per share in positive free cash flow 3.5 years from now. If you buy Boeing today at $360 per share and change, you're essentially paying 10 times Boeing's 2022 cash profits to own the stock. Credit Suisse thinks a fairer price for those profits is $427 a share -- about 11.9 times FCF. In the analyst's estimation, therefore, Boeing is selling for about 16% below what it is actually worth.
Of course, this whole line of reasoning only works if Boeing actually does generate positive FCF of $36 a share (well, $32 to $37) in 2022.
The upshot for investors
How likely is that to happen?
In 2018, before this whole 737 MAX mess arose, Boeing generated $13.6 billion in positive free cash flow. That's about $24.17 per share on the company's 562.6 million share count, according to data provided by S&P Global Market Intelligence. To get to $36 a share, therefore, Boeing would have to grow its free cash flow by about 49% over approximately four years -- or an annual growth rate around 12%. Given that Boeing did in fact grow free cash flow at 12% over the five years from 2013 to 2018 (again, according to S&P), I think that's a reasonable assumption, assuming the company does in fact get its 737 MAX planes in the air sometime early in 2020, and thus can resume selling them next year.
And so I think Credit Suisse is probably right in arguing that "long term investors may be rewarded for their patience."
The only question remaining, then, is: Can you remain patient, stick with Boeing stock, and be content with the 2.3% dividend payouts between now and 2022?
Well? Can you?
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