There’s no sugarcoating it: for nearly a year now, the 737 MAX passenger jet has been a thorn in the side of Dow component Boeing (NYSE:BA), and the wounds have been self-inflicted.
Last October, a Lion Air flight crashed in the Java Sea, killing all 189 people on board. In March, an Ethiopian Airlines flight also crashed, resulting in 157 deaths. Those flights experienced trouble soon after takeoff, 13 minutes after getting airborne in the case of the Lion Air trip and just six minutes into the Ethiopian Airlines flight. Both used the Boeing 737 MAX 8.
Those airlines had strong safety records and upon further investigation, it became clear that there were software glitches that needed fixing on the 737 MAX. Rightfully so, that plane has been grounded. And rightfully so, Boeing stock has been punished … sort of. The shares labor about 16% below their 52-week high, but Boeing stock is up more than 14% this month and is flirting with a year-to-date gain of nearly 20%.
Predictably, much of the near-term bull case for Boeing stock revolves around the company’s ability to get the 737 MAX kinks worked out and get the jet back in the skies. On Wall Street, the consensus expectation is that the 737 MAX could be airborne again before the end of this year, though some doubters put that timeline into 2020. Too deep into 2020 and some risks could emerge for Boeing stock. At the very least, here and now, progress is being made.
“We’re continuing to make solid progress on return to service,” said Boeing CEO Dennis Muilenberg at a recent investor conference. “We’re actively engaged with regulators around the world and day-to-day working with the FAA on return-to-service timing.”
Boeing Stock Beyond 737 MAX
Boeing has already cut its 2019 forecast for expected deliveries, so that drag is already baked into the shares. Amid the 737 MAX controversies, what investors may not be appreciating about Boeing stock are a booming services business and a considerable order backlog, among other catalysts.
Boeing’s “budding services business will boost operating income in coming years, as the company aims for $50 billion in annual revenue from this segment,” said Morningstar in a recent note. “We assume that coordinating with suppliers when vertically integrating its supply chain, and introducing the new 777X in 2020, while also attempting matching demand through production increases will be Boeing’s biggest challenges.”
The research firm notes Boeing’s backlog currently rests around 6,000 planes, which is enough for the company to ramp up production for a decade. Yes, passenger jets are a major source of revenue for the company and a significant drive of Boeing stock performance, but this is an aerospace and defense company, so investors should be in tune with Boeing’s defense leverage, too.
Last year, global defense spending rose to around $1.67 trillion, the highest level since the end of the Cold War. By 2022, that figure is likely to exceed $2.02 trillion. Uncle Sam is a big source of that growth and while Boeing doesn’t have a monopoly in the U.S., it does have plenty of advantages.
“Boeing also benefits from an entrenched position with the U.S. defense customer, a client that is typically conservative in its buying patterns and hesitant to switch to new contractors, particularly for mission-critical systems like aircraft and weapons,” said Morningstar. “Areas where Boeing has won sole-source awards (not opened to any competition) include missile defense, U.S. presidential transport, satellite terminals, and space launchers.”
BA Stock Bottom Line
Boeing is forecast to deliver double-digit margin growth over the next three or four years and some analysts model in an almost 50% increase in operating cash flow from 2018 through 2021. Assuming those targets can be reached or surpassed, Boeing stock at 16.9x forward earnings today is attractively valued.
However, risks remain. A multi-month delay on getting the 737 MAX back in the skies would be a near-term drag on Boeing stock, as would a significant slowdown in the global economy, the latter of which is a relevant point because foreign buyers hold significant percentages of backlog on select Boeing models.
Additionally, there is domestic political risk as the 2020 presidential election nears. If markets price in a defeat of President Donald Trump, who has been an ardent supporter of increased defense spending, Boeing stock could be pinched under such a scenario. That said, markets have a way overreacting that speculation and the aforementioned backlog and services business could help Boeing stock perform well even if the current president is limited to one term.
Todd Shriber does not own any of the aforementioned securities.
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