Reducing Boeing's Fair Value Estimate

We are reducing our fair value estimate for Boeing BA by roughly 15% to $281 per share as we adjust how we value the firm’s increased debt burden due to the continued 737 MAX grounding amid the coronavirus pandemic. We also assume that the firm accepts the government’s $17 billion loan offering and receives similar conditions to the airlines that have already received this federal support. These conditions require that 10% of the loan’s value be issued to the government in equity at current valuations. We don’t think that an incremental $1.7 billion of equity would materially dilute Boeing’s current market capitalization of roughly $70 billion. Overall, while we agree that near-term headwinds are fierce, we continue think that there are long-term tailwinds for the firm, including a favorable industry structure and long-term growth stemming from an emerging global middle class. Boeing’s first-quarter financials are not available yet, but given the information available, we believe that the funding set aside for firms critical to maintaining national security in the CARES Act will be enough to keep Boeing running until commercial aviation rebounds.

Boeing announced on April 25 that it terminated the agreement to acquire a majority stake in Embraer’s commercial aviation unit via a joint venture. We think Boeing made the right call in a difficult situation. While we see the long-term strategic value of expanding into the regional jet market and being able to compete with Airbus’ product line up from the partnership, we recognize that Boeing would be buying a commercial aviation asset in 2020 at a 2019 price. Further, Boeing is burning cash from running current operations, considering substantial workforce reductions, and we expect that it will take a loan from the government. We think it would be quite politically difficult to fund a foreign acquisition while domestically cutting the workforce.

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