Boeing Raises and Conserves Cash in Second Quarter

Wide-moat-rated Boeing BA reported a pivotal quarter as the company adjusts its longer-term commercial production targets to better serve the smaller aviation market. We’re reducing our fair value estimate to $264 per share from $281 to reflect lower midcycle 737 MAX and 787 production and consequently a lower midcycle operating margin due to less learning curve improvements. We remain bullish on the stock, and our critical assumption is that Boeing will return to 2018 narrow-body production levels by 2024, which is predicated on the assumed wide distribution of a COVID-19 vaccine by mid-2021.

Commercial revenue dropped 65% due to lower deliveries and lower predelivery payments, or PDPs. While the MAX has now been grounded for over a year, Boeing had still been receiving PDPs from numerous customers for MAX orders in 2019 and faced a far more accommodative wide-body market. Within the valuable narrow-body market, the 737 MAX remains grounded and the firm has lost roughly 7.5% of its unadjusted order book year to date, but the firm has made visible steps toward recertification. Particularly, Boeing has completed the MAX’s certification flight and the U.S. Federal Aviation Administration intends to open up a public comment period on the proposed rulemaking soon. We are slightly pushing back an assumption on an airworthiness directive to early fourth quarter, but we are encouraged by the visible progress toward recertification. A critical question remains if airlines will be able to take delivery of the aircraft. We’re assuming that a COVID-19 vaccine will be available by the end of 2020, which we think will be a critical sign for airlines to prepare for bringing capacity back. Boeing noted that roughly 4.25% of the global fleet has been grounded since the beginning of the pandemic, so airlines will need to take delivery of new aircraft to return to 2019 capacity.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.