Boeing is a standout in the aerospace sector. While many stocks in that sector have outperformed the market in 2022, and some (Raytheon Technologies, AAR Corp, and Hexcel) are in positive territory altogether, Boeing stock is down as much as 36% in 2022 and 48% over the past year. So what's going on? And is this drop a buying opportunity? We suggest we sort it out.
Not many doubt that Boeing's problems are a combination of general market conditions and its performance problems. Unfortunately, there are a lot of the latter. If it's not multi-billion dollar cost overruns and accusations of Boeing's defense business, it's significant operational and regulatory problems on all major commercial aircraft.
The 737 MAX was supposed to be a narrow-body workhorse in the sky along with the Airbus A320 NEO family. However, the plane's withdrawal from production after several high-profile accidents has undermined its credibility, and now Boeing is struggling to ramp up production to meet its plan. Worse, the company has been criticized by leading figures in the industry (Ryanair CEO Michael O'Leary and Avolon giant leasing company CEO Domnal Slattery) for its leadership and failure to deliver aircraft on time.
Meanwhile, in the wide-body segment of the business - where Boeing is often seen as an advantage over Airbus - the continued postponement of the initial delivery date of the Boeing 777X (an aircraft seen as a leader in the wide-body replacement cycle) and the 787 delivery stoppage at the request of regulators continue to haunt the aircraft giant. If all of this isn't bad enough, Boeing's growing debt and shrinking cash flow indicate that the company may have to raise more cash in the future.
After all this bad news, it may seem surprising to hear that there is a strong case for buying the company's stock. Much of this hinges on the many factors that have long supported the company in the past:
Boeing is still one of the two largest aircraft manufacturers capable of competing across the market spectrum, and Airbus is also struggling to ramp up production.
The company still has a huge order book of 3,365 Boeing 737 family aircraft, 405 Boeing 787s, and 227 Boeing 777Xs.
In 2022, demand for commercial air travel grew strongly, and the industry is experiencing a multi-year recovery.
Many of Boeing's problems have arisen on their own, which means that the stock could outperform expectations if and when management resolves its execution and regulatory problems.
In short, the end market remains favorable, and if the company can end a seemingly endless string of multibillion-dollar spending and regulatory problems, better days lie ahead. Boeing now needs to start ramping up production of the 737s, gradually working on the traditional margin expansion that usually occurs as production increases. Meanwhile, getting approval to resume 787 deliveries will be a significant plus, and moving toward meeting the new first delivery date (2025) for the 777X will reassure investors.
If Boeing can do all this, the upside prospects will be significant. After all, market capitalization is only $77.6 billion for a company that delivered $13.6 billion worth of aircraft in 2018 - before the 737 MAX and COVID-19 landed. A return to close numbers would make the company's stock look very favorable. Thus, Boeing stock has a history of "self-help," which is not a bad thing in an uncertain economic environment.
Nevertheless, if Boeing continues to take on costs and lose money, there is still a downside risk. Failure to meet obligations could result in the need to borrow money when interest rates rise or sell shares at a low price.
If you can't tolerate significant risk in the short term, the answer is no. Similarly, for investors who only want to invest in high-quality companies with a notable track record, it's also a "no." Moreover, there are many other ways to invest in the aerospace sector. With all that said, Boeing's upside potential is significant, and if the company can demonstrate that it is on top of its challenges, long-term value investors may want to take a closer look at those levels.
As long as the price is below 142.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 136.49
- Take Profit 1: 116.00
- Take Profit 2: 106.00
Alternative scenario:
If the level of 142.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 142.00
- Take Profit 1: 157.00
- Take Profit 2: 175.00
