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Proprietary Data Insights Financial Pros’ Top Aerospace & Defense Stock Searches in the Last Month
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Boeing: Buy of a Lifetime or Total Dumpster Fire?
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When the CEO pulled guidance for 2024, investors new something was wrong. Boeing (BA) typically provides its annual guidance at the start of the year. CEO Dave Calhoun said not this time. The door blowout on an Alaska Airlines flight was the latest in a string of quality problems for Boeing’s 737 Max. Everyone was on the company’s back, from the FAA to United Airlines, which threatened to cancel an order for 10 aircraft. Calhoun said he wanted to buckle down on quality. That’s a tall order when the average 737 Max uses parts from 45 main suppliers, hundreds of subcontractors, and over 400,000 different parts. According to our Trackstar data, big money managers began searching for Boeing’s ticker and detailed analysis, implying their performing their due diligence. We concluded that many financial pros see the stock’s pullback as an opportunity, not a warning. Allow us to explain why. Boeing’s Business We all know Boeing for its American-made aircraft. But did you also know they design, manufacture, and produce other aeronautical and defense solutions? Beyond its family of commercial airplanes, Boeing delivers military aircraft, telecommunications equipment, and even systems to power space travel. The company’s financials breakdown as follows:
Let’s talk about Boeing’s…problems. You probably know about the Alaska Airlines flight that had to make an emergency landing because the door flew off midflight. Soon after, Boeing’s jets collided a Chicago O’Hare airport. Then, the Secretary of State’s plan had a critical failure in Davos. Finally, a 747 cargo plane caught fire in midair. However, these incidents haven’t stopped Boeing for long. The FAA cleared the 737 Max 9 jets for service. In China, the government finally permitted Boeing to sell to the mainline, which could account for 19% of this year’s deliveries. Unless Boeing encounters a systemic problem like it did when it initially rolled out the 737 Max, the returned focus to quality should suss out any major issues. Financials
Source: Stock Analysis Shares of the company trade about 40%-60% lower than in 2019. Yet, revenues are only down about 23% from the highs set in 2018. Boeing’s business took a huge hit from the pandemic. Yet, it never went bankrupt nor borrowed money from the government. The only things preventing even higher revenue growth are Boeing’s quality issues and scalability. And that’s what’s crimped margins. Gross margins sit at 10%, almost half what they were in 2019. Gross profits are down 60% from 2018, though 73% higher than 2019. Free cash flow is 67% lower today than it was in 2018. So, it’s fair to say Boeing’s stock deserved the hit. Plus, debt skyrockeed from $13.8 billion in 2018 to $28.5 billion in 2019, to $64.9 billion in 2020. Luckily, management has brought that balance down to $54.1 billion. But interest expenses are now $2.5 billion annually compared to $722 million in 2019. Nonetheless, forecasts for ~15% revenue and earnings growth say this stock could be underpriced. Valuation
Source: Seeking Alpha Compared to its peers, Boeing is necessarily the cheapest. Lockheed Martin (LMT) trades at 13.1x cash, while General Dynamics (GD) trades at 15.5x. Embraer (ERJ) trades at just 9.7x cash, with revenue growth comparable to Boeing’s. Growth
Source: Seeking Alpha Boeing’s premium relies on its forecasted revenue growth. But as we mentioned, Embraer is right in line with them. The big difference is the discount placed on Embraer as a Brazilian company. Otherwise, we suspect it would trade at similar multiples to Boeing. Profitability
Source: Seeking Alpha Aerovironment (AVAV) certainly tops the list for profitability so long as you don’t dig too far. Because it turns out they don’t generate cash from operations. On a P&L basis, only Lockheed Martin and General Dynamics have positive net margins. At least Boeing tops the list for free cash flow margin. Our Opinion 9/10 We believe Boeing trades at a discount, albeit not a huge one. 2024 will likely be more costly than they expected. But, as long as the company keeps improving and growing operations while paying down its debt, it has a bright future. We’d be fine with starting a position here. However, picking up the stock anywhere near $150 would be outstanding. |
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