Boeing (BA), a globally recognized aerospace company, has long been a pillar of the aviation industry. It is well-known for its iconic planes, such as the 737, 747, and 787 Dreamliner.
Boeing's position as one of the largest aerospace companies globally is a compelling factor driving growth. The company's history, technological prowess, and market presence give it a significant competitive advantage. Furthermore, recent tailwinds signal a strong growth recovery for Boeing.
The surge in travel demand post-pandemic is boosting airline stock performance across the board. Boeing’s stock is up 33% year-to-date, outperforming the S&P 500 Index’s ($SPX) gain of 24%. The stock has even outperformed the benchmark iShares U.S. Aerospace & Defense ETF’s (ITA) gain of 13%. Let's take a closer look to see if Boeing is a good long-term investment now that the company is on the path to recovery.
Boeing's Strengthening Fundamentals
Following a turbulent ride during the global pandemic, Boeing is flying high again, thanks to an increase in post-pandemic travel demand. Beyond commercial airplanes, Boeing operates in the defense, aerospace, and security sectors. This diversification helps cushion the impact of industry-specific challenges.
Notably, Boeing operates through four segments: Commercial Airplanes, Defense, Space & Security, and Global Services. All four segments saw significant improvement in the third quarter.
Boeing's commercial aircraft business, after struggling for a while, is seeing a rapid surge in demand. The commercial airplane segment’s revenue jumped an impressive 25% year-over-year to $7.9 billion in Q3. In the Q3 earnings call, management stated that Boeing had “400 net orders in the quarter," which included orders from Ryanair (RYAAY), United Airlines (UAL), and Saudi Arabian Airlines.
Meanwhile, sales in the defense and space segments increased 3.3% year-over-year to $5.5 billion. Total revenue in the third quarter grew 13% to $18.1 billion from the year-ago period.
Boeing faced difficulties when the 737 MAX was grounded between March 2019 and December 2020 due to a series of fatal crashes. However, the company has resumed deliveries of 737 MAX globally and expects to deliver between 375 and 400 aircraft this year.
Recently, German airline giant Lufthansa Group signed a deal with Boeing for a massive order of up to 100 737 MAX jets, priced at $9 billion. Furthermore, Ireland-based aircraft leasing company Avolon also announced its intention to purchase 40 more 737-8 airplanes in 2023, upon shareholder approval.
Recently, CNBC reported that Boeing received a “key clearance from China’s aviation regulator moving it a step closer to resuming deliveries of 737 Max aircraft to the country after a more than four-year freeze.” While the company has yet to receive full approval from China's National Development and Reform Commission (NDRC), this represents a significant step forward in the recovery of the 737 market.
This surge in demand for the 737 signals a vote of confidence in Boeing’s quality of products, which could be a driving factor for revenue growth in the coming years. For the full year, analysts predict Boeing’s revenue to increase by 15.1% to $76.6 billion, further rising to $91 billion in 2024.
Furthermore, to improve operational performance, Boeing made some internal C-suite leadership changes. Beginning Jan. 1, 2024, Chris Raymond will be the president and CEO of Boeing Global Services.
The Challenges for Boeing
While its legacy, diversified portfolio, and technological advancements are promising, Boeing faces challenges. As an airline and defense company, Boeing must invest heavily in research and development (R&D) to lead in technological advancements.
This could put a strain on the company's profit margins and cash flow. For instance, the company spent $958 million in R&D expenses in the recent quarter. Its adjusted free cash flow (FCF), which helps a company repay debts and fund future expansion projects, remained negative during the third quarter.
The company also remains unprofitable, as net losses in the quarter came in at $3.26 per share. However, the company narrowed its losses from $6.18 per share in the year-ago quarter. Furthermore, CFO Brian J. West stated that Boeing expects profit margins to be positive in 2024 as the BCA (Boeing Commercial) segment could see a surge in volume going forward. Analysts also expect the company to turn a profit in 2024.
Looking ahead, Boeing expects to generate a positive free cash flow of $3 billion to $5 billion for the full year 2023, with $10 billion in FCF by 2025 and 2026.
Though Boeing has suspended its dividend program following the pandemic losses, generating positive free cash flow could result in dividend payments being reinstated. However, no such announcements have yet been made by the company.
Is Boeing a Buy or Sell, According to Wall Street?
Overall, Wall Street remains highly bullish about Boeing stock, rating it a “strong buy” overall. Recently, analysts at Citi, Deutsche Bank, Susquehanna, Morgan Stanley, and many others raised the target price for BA.
Out of 19 analysts covering the stock, 16 have a “strong buy” rating, one has a “moderate buy,” and two rate it a “hold.” The average analyst average target price for BA is $273.67, indicating an upside potential of 5.3% over the next 12 months. However, its Street-high target price of $320 implies 23% growth from current levels.
The bullish sentiment among analysts could fuel Boeing's stock price even further. Boeing stock is currently trading at 1.7 times forward 2024 sales, which is slightly lower than the company's five-year historical average price-to-sales ratio of 2. Given the long-term prospects in the aerospace industry, Boeing appears to be a reasonably valued growth stock right now.
The Final Verdict on Boeing
The demand for commercial airplanes and space exploration has historically been robust, and this trend is likely to continue. According to Precedence Research, the global aerospace market could grow at a compounded annual growth rate of 7.8% to be worth $678.1 billion by 2032.
Some temporary setbacks, such as the global pandemic that reduced air travel demand significantly, can cause short-term obstacles. Nonetheless, long-term growth prospects for both air travel and aerospace, as well as the need for newer, more efficient aircraft, remain promising.
That said, investing in Boeing requires a long-term perspective, as airlines and defense stocks are cyclical. Investors should take note of the company’s resilience to industry fluctuations and ability to innovate, which can drive growth over time. Since Boeing isn’t profitable, it remains a wise investment choice for growth-oriented investors with a good risk appetite who believe in the company’s long-term potential.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
