Is Boeing Stock Undervalued?

Boeing Co (NYSE:BA) was facing hard times during the coronavirus, and it sought a $60 billion bailout from the U.S. government to stay in business.

It didn’t help that it was already battling bad press from its 737 Max disaster. Instead of a bailout, the government assisted in purchasing government bonds, which then led to the company raising $25 billion from private investors.

This means unlike the commercial airline industry it services, Boeing is free from government debt and its restrictions. Still, the company’s stock is struggling in the $150-200 range at the end of 2020, leading some investors to ask – is Boeing stock undervalued?

Boeing Runs Into Turbulence

Its market cap is below $100 billion, and the 737 MAX has been cleared for takeoff again in both the U.S. and European Union. This allowed airlines like American Airlines Group (NASDAQ:AAL) to put them back into service.

Of course, it’s not going to be all clear skies for the company, as the major airlines are lowering their planned airplane orders and preparing for a shrinking economy over the next two years. This is surely going to impact Boeing’s bottom line, and it may find itself in a need of fundraising again very soon.

Now the question for investors is how fast (or even if) it can rebound?

Why Boeing Stock Is Down

As mentioned at the top, Boeing’s stock was hit with a one-two punch that knocked it down. It started in March 2019 when the company’s 737 MAX was grounded after two fatal accidents killed 346 total passengers.

The problem was found to be an update made to the plane’s Maneuvering Characteristics Augmentation System (MCAS), a flight control system that had lapsed certifications from the Federal Aviation Administration (FAA). This forced the company to halt production in January 2020, with 400 MAX airplanes still awaiting delivery.

Then the coronavirus hit and grounded flights worldwide. This caused the global airline industry to lose 95 percent of customers during the initial stay-at-home orders.

Travel restrictions were eventually lifted, and airlines gained revenue. But they also took cost-cutting measures to prepare for a deflated market over the next several years.

This included lowering their future airplane orders, dropping demand for Boeing’s products by 11 percent over the next decade. This outlook gave investors plenty of reason to press pause on the company’s stock.

Next, we’ll evaluate the company’s financials to determine how it’ll fare in this stormy weather.

Could Boeing Financials Take Off Again?

Boeing President and CEO David Calhoun is optimistic, although he does admit the company faces a shrinking market.

Its most recent earnings report showed the company is decreasing production of most of its fleet for 2021.

The company’s revenue in the second quarter of 2020 was $11.8 billion, compared to $15.8 billion the same quarter of 2019. This was caused directly by the coronavirus pandemic, which drove a -$4.79 loss per share.

It also lost operating margins, which stood at 9.1 percent in the second quarter of 2020, versus 14.8 percent in Q2 2019 in its defense and space division.

Its global services division lost the most, plummeting to a negative 19.3 percent margin.

The company’s operating cash flow dropped to -$5.3 billion versus -$0.6 billion in the same period of 2019.

Still, the company has $32.4 billion in cash on hand, which it’s going to need to pay off the $59.5 billion in debt on its balance sheets.

Because of this, the company suspended dividend payments and terminated its share repurchase program.

Is Boeing Valuation Too Low?

Boeing is trading in the $160 to $170 range approaching the release of its Q3 earnings report in late October. This is a far cry from its 52-week high of $375.60, but it’s also well recovered from its 52-week low of $89.00.

Boeing is ready to take off, and it has high hopes now that both the U.S. FAA and E.U. Aviation Safety Agency have reapproved its 737 MAX for flights.

Having American Airlines, the biggest airline in the country, announce its confidence in the plane is a great sign. However, it’s unclear how passenger sentiment will follow, considering they’re the ones at risk of fatality.

Successful AA flights will certainly lead to other airlines putting the plane into service. However, the U.S. Center for Disease Control continues recommending social distancing guidelines and minimal travel restrictions through the rest of the year.

The impending flu season puts holiday travel up in the air, and this led to the airlines slowing their orders. This puts Boeing investors in a precarious position, as it may actually be priced where it needs to be considering the slowing market conditions.

But can Boeing’s stock rise or even outpace the Dow Jones or S&P 500 indices?

Will Boeing Stock Rise?

Boeing’s sub-$100 billion market cap seems to be following the company’s revenues. In 2019, its total annual revenue was $76.6 billion, compared to $101 billion in 2018.

It’s unlikely that this market cap will rise above the $100 billion level until the company shows proof that it’s cutting costs, managing cash bleed, and fixing margins.

It has room to grow, but that’s unlikely to happen in the next 10 years, based on the company’s forecast of an 11 percent drop in airplane demand. However, if it finds a way to beat analyst estimates, investors who buy in now could stand to double their money in the long term.

Is Boeing Stock Undervalued? The Bottom Line

Boeing had a turbulent 2020 caused by both the coronavirus and the prior year’s failure involving its 737 MAX plane.

This caused the company to approach the federal government for a bailout that turned into a different opportunity to raise money from private investors. Still, the company’s burning cash and faces declining demand for its products over the next 10 years.

Although Boeing is currently in no danger of bankruptcy, it’s a problem that will loom on the horizon for the next decade. This has investors bearish on the stock.

If it does fix its problems and respond to the pandemic, there are gains to be made. It’s up in the air if the company can return to its luster of prior years though.

---

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.