Summary:
Boeing's latest earnings show the company's cash flows are improving as airlines slowly begin taking 737 Max orders.
Despite the earnings surprise, Wall Street remains divided on the long-term pull of BA stocks.
China, where MAX is still grounded, remains the biggest short-term risk for BA stocks.
Of the major US companies, Boeing (NYSE:) presents an interesting risk-return proposition for long-term investors. As the aerospace giant is slowly regaining lost ground after three disastrous years, the ongoing pandemic and the company's manufacturing problems are hampering a solid recovery in its business.
This situation is keeping Boeing stocks under pressure, despite a strong rebound from the market crash in March 2020. BA shares have changed little this year, lagging hugely behind the , which is up about 16% over the period . Trading at $218.17 at the end of the Friday before the long weekend, BA remains about 50% higher than its all-time high it reached early 2019.
Some investors believe now is a good time to buy BA shares as the aerospace giant shows signs of a nascent recovery after one of the worst financial crises in the aircraft maker's centuries-old history. Its flagship MAX jets were grounded for nearly two years after two fatal crashes that killed 346 people.
That crisis was followed by the global pandemic, which sapped demand for new aircraft as passengers stayed home and airlines cut back. During this period, Boeing also struggled with production quality issues on its 787 Dreamliner.
Bulls favoring Boeing stocks point to the company's earnings momentum in its latest quarterly results. That report sent a strong signal that the company is slowly reducing its cash burn and perhaps the worst of this downturn is over. For the July 28 announcement, Boeing reported profits for the first time in nearly two years, surprising Wall Street.
Adjusted earnings of $0.40 per share were not the only sign of progress in the company's second quarter financial results. In addition, the manufacturer burned just $705 million in cash, better than the $2.76 billion outflow analysts had forecast.
Sales rose 44% to $17 billion as shipments of jet aircraft quadrupled from a year earlier, including 47 of the company's MAX jets. It has delivered more than 130 MAX jets since the plane was allowed to fly again in some countries late last year. Airlines have also put more than 190 of the jets once grounded back into service. plans to cut nearly 20% of its payroll as it prepares for a production increase in the coming years.
Chief Executive Officer Dave Calhoun said during a profit call:
“We turn a corner and the recovery is gaining momentum. I've said before that we see this year as a crucial turning point, and it turns out to be just that.”
However, the strong performance in the second quarter is not enough to change the minds of some of the more skeptical analysts, including Bank of America's Ronald Epstein.
In a note, Bank of America stated:
"We estimate that Boeing is still at nearly 400 737 jets in excess inventory. We maintain our neutral rating. While we believe Boeing will participate in the commercial aerospace recovery, there are some company-specific challenges in the offing.”
Bank of America has a price target of $265 for the stock.
Wells Fargo, which is equally weighted for the stock with a price target of $244, also urged caution given long-term business uncertainties.
In a recent note, the bank said:
"We expect positive demand trends for Boeing in the near term, including a strong summer travel season given pent-up demand and improving airline cash, which could lead to further aircraft orders. Longer-term prospects are less clear as international travel moderates remains, the 737 MAX is likely to continue to lose some of the key narrow-body market, capital is constrained by high debt/development costs for new aircraft, and we believe the defense portfolio will continue to underperform.”
Of the 24 analysts surveyed by Investing.com, 13 have a buy recommendation, while 11 remain neutral, with a 12-month consensus target of $267.91 per share.
Key risk in China for BA stocks
China remains one of the biggest risks to Boeing's recovery efforts. Deteriorating trade relations between the US and China have limited sales in the world's largest growth jet market, with no new orders since 2017. China has not yet lifted a ban on the MAX 737, leaving people guessing about its intentions.
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In its June analysis, Reuters pointed out:
"Tensions over trade power, regulatory hurdles and attempts by the West to stifle Chinese competition are delaying the return of the 737 MAX to China, frustrating Boeing as a potential rival is growing influence."
According to the International Air Transport Association, China will surpass the US as the world's largest aviation market by 2024, making the communist country an essential customer for both Boeing and Airbus Group (OTC:). Boeing expects China to buy 7,690 jets worth $1.19 trillion over the next two decades, accounting for nearly a quarter of global demand. It says 5,730 of those will be single-aisle jets like the 737 MAX.
Boeing CEO Dave Calhoun warned in June that a prolonged trade deadlock between the US and China threatens Boeing's role as a leader in the airline industry.
Calhoun of the Chinese market said in a Bloomberg report:
“If I'm not allowed to serve, I'm giving away global leadership. I will never give that up. But it will cause real problems for us in the coming years if we cannot thaw some of the trade structure.”
Bottom Line
Boeing is definitely in better financial shape than it was two years ago. The company is slowly overcoming its problems and improving its cash position. That said, the stock remains in a prolonged bearish cycle given the company's manufacturing missteps, changing travel patterns after the pandemic and because of the company's massive reliance on China for growth. These factors, despite the company's strategic importance, make BA stock less attractive than other opportunities available in the market.
