Boeing shares have been trading sideways for quite some time. For any other company this might not seem like such a big deal, but for Boeing, historically, it’s unusual.
Boeing (BA) was the best performing stock on the Dow Jones Industrial Average (DIA) for the decade between 2009 and 2019 – and investors had gotten used to continual success. Indeed, the company’s share price rocketed 1,307% over that period, and it looked to many like it was unstoppable.
But fast forward a few months to the outbreak of the coronavirus pandemic, and the company’s story arc changed considerably.
Commercial aircraft carriers saw their businesses decimated, and the knock-on effect to original equipment manufacturers like Boeing meant the outlook was overwhelmingly bleak. Boeing racked up nearly $64 billion of debt over the two years up to and including the pandemic, and shareholders started exiting en masse.
All of this left investors wondering whether a recovery was on the cards for Boeing, or whether things were just going to get even worse from here on out?
How Bad Could Things Get For Boeing?
The Boeing Company (BA) faced what was really the worst-case scenario in 2018/19 when two high-profile and fatal airplane crashes led to its entire fleet of Boeing 737 MAX passenger airlines having to be grounded. However, six months after the firm got the all-clear to fly again in December 2020, the Federal Aviation Administration (FAA) discovered another electric problem which led to a further partial ban and increased scrutiny on the company.
These issues ultimately led to Boeing having to postpone some scheduled deliveries, and the disruption hit the company’s bottom line, if not exactly its share price.
However, what pulled down Boeing’s stock value was the effect that COVID-19 had on the aviation industry. Having weathered what seemed like the worst of the pandemic, the company hoped that things would eventually return to normal.
But with news of the delta variant casting doubt on the success of the global vaccine program – and raising the specter of further lock-downs – the hoped for economic recovery that the industry so desperately needed appears now be on hold.
Despite the desperate picture created by Boeing’s current woes, there’s still a lot to be positive about. For instance, the company’s order books are filing up pretty rapidly, especially as its defense contracts keep rolling in.
Work worth $436.7 million for its Apache AH-64E Helicopters program got the go-ahead this April, along with a $106.8 million contract for its Flight Test Telemetry Termination Rapid Fielding Initiative, and a further $163.5 million for the P-8 Poseidon maritime patrol aircraft.
Other contracts were extended too, relating mainly to Boeing’s F-15 Eagle Passive/Active Warning and Survivability System, the Japanese KC-46 program, and a $90 million payment on an indefinite delivery/ indefinite quantity contract.
Likewise, its civil aviation wing was also boosted by several important orders. This was particularly reassuring because Boeing makes most of its revenues – around 55% – from its Commercial Airplane division. Its yearly revenues hit a high of $100 billion in 2018, but declined by 25% the following year mainly because of the difficulties with its Boeing 737 MAX program.
Now with interest in Boeing’s products coming from Air France-KLM and some Chinese aviation officials, a return to pre-pandemic revenue numbers might not be that far off.
Is Boeing’s Moat Still Strong?
It’s fortuitous that Boeing is essentially an aerospace company and a defense contractor rolled into one. For shareholders that’s a good thing; Boeing enjoys the rock solid, impenetrable moat that these industries also enjoy.
This has, in the past, led investors to view the business as “too big to fail”, because the importance of Boeing’s operations to many critical supply chain systems means the company fulfills both a commercial and strategic role for many national governments, and the prospect of its demise is simply not on the cards anytime soon.
However, as we’ve seen with the debacle over Boeing’s inability to get its latest model cleared by aviation authorities, its aura of invincibility might be slipping. But for now its business moat remains intact, and should be viewed by shareholders as a good reason to hold on to their stock.
Free Cash Flow Is The Future
If Boeing’s fortunes are to rally again, a big part of that will come down to whether it can repair its free cash flow (FCF) in time. Boeing had been growing its FCF for seven years when it eventually hit a high of $13.7 billion in 2018.
Unfortunately, in the wake of the problems with its 737 MAX, Boeing’s FCF dropped to negative $3.9 billion in 2019, and fell even further in 2020 to negative $19.7 billion. This had an immediate consequence, since, before 2020, Boeing was raising its dividend 15% every year.
However, just like with many of other companies the firm had to suspend its dividend payout in 2020, due mainly to pandemic headwinds and an obvious loss of available cash to cover its shareholder distribution.
The good news is that analysts see the company making progress in the next couple of years. Forecasters still predict that 2021 will see another deficit of $5.8 billion, but will return to a net positive FCF in 2022 of $7.9 billion.
If the company can turn around its cash flows again, it can begin reducing its heavy debt load and open up the possibility of reissuing its dividend at some point in the future.
For now though, investors will have to live with much uncertainty and very little in the way of guarantees. The best scenario is that the pandemic abates and Boeing’s technical problems get resolved. But given the way things have gone the last few years, that will require a lot of hope and a handful of crossed fingers.
So high can Boeing stock go? If all goes well and projections come to fruition, a discounted cash flow analysis places the intrinsic value per share on Boeing at $261.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.