Is Boeing (BA) a recovery play? Upside Potential and Risk Assessment

Boeing (BA)The aircraft manufacturing and service stalwart has faced numerous challenges so far this year. As the dust settled from last January’s mid-air explosion, another report surfaced that the plane was having mechanical problems, and this one is somewhat different from the reports we’ve already heard.

This time it’s a Delta flight from New York to Los Angeles, and they’re reporting that there’s a problem with the right wing emergency slide and that it’s making a strange noise. This isn’t good news for Boeing, but considering the plane is quite old (flying since 1990), it’s not expected to cause much of a problem.

Let us now evaluate the upside potential and risks associated with investing in BA, considering factors such as financials, growth prospects, valuation, and industry dynamics.

A turbulent start to 2024

Boeing and its aircraft manufacturer have since received considerable media attention. The beginning of 2024, a series of events occurred that prompted the investigation. In January, an Alaska Airlines Boeing 737 MAX 9 had to make an emergency landing in Portland, Oregon, after part of its fuselage exploded.

There were no casualties, but an investigation by the U.S. National Transportation Safety Board (NTSB) found that the door did not close properly. missing bolt. As a result, we got the following results: Grounding of 737-9 MAX aircraftThe plane manufacturer’s 737 production and safety processes have come under increased scrutiny and overall production of the plane has decreased.

In late January, an All Nippon Airways (ANA) Boeing 737-800 had to return to Japan after a crack was discovered in a cockpit window during flight.

On February 21, a United Airlines Boeing 757-200 made an emergency landing in Denver due to wing damage. Moreover, in March, a United Airlines Boeing 777-200 had to land in Los Angeles after a tire fell off after takeoff, damaging the vehicle below.

Other accidents include a short rudder control failure on a Boeing 737 Max in New Jersey, a United Airlines Boeing 737 MAX 8 running off a taxiway in Houston, and a Boeing 737 in Medford, Oregon, where a panel was found missing.

Also on March 18, an Alaska Airlines Boeing 737 had a crack in its windshield upon landing in Portland.

Can we trust Boeing again?

These incidents were a major blow to the company and raised concerns about BA’s approach of prioritizing profits over safety. In particular, the Alaska Airlines accident led to greater regulatory scrutiny, financial repercussions, and compensation claims, potentially disrupting Boeing’s growth trajectory.

But the company has taken steps to improve quality, including expanding inspections, changing how work is done, increasing training and soliciting more feedback from employees.

“We are committed to ensuring that regulators, customers, employees and the flying public have 100% confidence in Boeing,” said Boeing CEO Dave Calhoun. letter to employees last week

Additionally, the company is also in acquisition talks. Spirit Aerosystems Holdings (SPR), the troubled supplier that builds the bodies for the Max jets that were part of Boeing until it was spun off 20 years ago. this potential acquisition This reflects Boeing’s commitment to streamlining its supply chain, enhancing production capacity, and increasing control over supplier policies and practices.

disappointing financial performance

Despite a rough start to the year, Boeing reported slightly better quarterly results than feared but continued to burn cash (about $4 billion) to stabilize production. Boeing’s profits took a big hit in the first quarter as fewer aircraft rolled out of the factory over the past three months.

For the quarter ended March 31, 2023, the company recorded total revenue of $16.57 billion, down 7.5% year-over-year. Non-GAAP core operating losses were $388 million and $1.13 per share, respectively. Additionally, BA’s net loss for the quarter amounted to $355 million, which was not as steep as analysts had expected and was smaller than the $425 million loss in the year-ago period.

Boeing’s commercial aircraft deliveries fell 36% in the first three months of 2024 compared to the same period last year. The airline also reported operating cash outflows of $3.36 billion, compared to cash outflows of $318 million in the year-ago period. It also had negative free cash flow of $3.92 billion, compared with a loss of $787 million a year ago. Additionally, total company backlog increased to $529 billion, including more than 5,600 commercial aircraft.

CEO Dave Calhoun highlighted the ‘tough moments’ and said: “Reduced deliveries can be difficult for customers and financially. But safety and quality are and will remain paramount.”

Mixed analyst expectations

As Boeing continues to spend significant costs resolving identified issues, compensating affected parties and dealing with potential legal challenges, CFO Brian West said the company will have “significant cash leverage” in the second quarter. I believe it will.

Analysts expect BA’s revenue for the fiscal year ending December 2024 to reach $81.09 billion, up 4.2% year-over-year. However, the company is expected to report a loss of $0.55 per share. Revenue for the quarter ending June 2024 is estimated at $19.05 billion, down 3.6% from the previous year.

However, the Street expects revenue for the company’s next quarter (ending September 30, 2024) to reach $21.46 billion, up 18.5% year over year, with earnings per share expected to be $0.41.

During this difficult period, Calhoun said: “We are leveraging this period to intentionally slow down our operations, strengthen our supply chain, enhance factory operations, and ensure Boeing continues to deliver reliability and quality. “Customers expect the long term.”

conclusion

BA’s ongoing challenges, including numerous safety issues, production disruptions and delivery delays, have placed the company in a complex situation where future demand forecasts are becoming increasingly uncertain. These headwinds will have a significant impact on the airline’s customer base, leading to lower profitability, cash flow issues and inventory issues that could persist for some time.

Despite these near-term obstacles, the company remains committed to strengthening its market position, achieving long-term growth prospects, and improving predictability for both customers and investors. But this process will take time and collaborative effort.

Ultimately, the market’s confidence in Boeing will depend on its ability to overcome current challenges. But the problem still remains. Could recovery happen soon?

Price-to-value, the stock is down nearly 15% over the past three months and down more than 33% since the beginning of the year.

Moreover, the current stock price seems quite expensive. Currently, BA is trading at a forward P/E of 142.59x, which is significantly higher than the industry average of 23.99x. The company’s forward EV/sales is 1.81 times, which is 2.9% higher than the industry average of 1.76 times. Additionally, the future EV/EBITDA is 33.92x, compared to the industry average of 11.30x.

Additionally, BA’s trailing 12-month gross margin and leveraged FCF margin of 11.48% and 4.01% are 62.7% and 38.9% lower than the industry averages of 30.80% and 6.56%, respectively. Additionally, its net profit margin is negative 2.81%, compared to the industry average of 5.86%.

Argus Research recently downgraded its outlook for BA shares. Buy and holdThe target stock price is estimated at $243.01, with an upside potential of 40.1%. Northcoast Research also downgraded the stock. sell neutral.

Considering these factors, we believe it may be prudent to wait for a better entry point into this stock for now.