Source: PaxForex Premium Analytics Portal, Fundamental Insight
Boeing's shares have experienced an impressive surge over the past year, soaring by 50%. Remarkably, the stock has almost doubled in value since hitting its low point in September of the previous year. Investors remained upbeat about the company's turnaround, leading to a further 13% rally in the stock last week.
Looking ahead, the positive trajectory of Boeing stock may be sustained into 2024 and beyond, thanks to improving financial metrics. However, it's important to note that the current valuation appears to be priced optimistically, leaving little room for error. In order to justify its current valuation, the company would need to achieve substantial future growth. If this growth fails to materialize, long-term investors may be disappointed.
Boeing's recent second-quarter earnings report indicates a stabilization of the company's financial performance. The positive news includes generating $2.6 billion of free cash flow during the period, leading the company to reaffirm its full-year cash flow guidance. Additionally, Boeing utilized some of its available cash to pay off over $3 billion of debt in the last quarter.
However, there were challenges in certain areas. Two out of Boeing's three major business segments experienced losses in the second quarter. The commercial jets division faced difficulties due to low production rates and increased expenses, resulting in an operating loss of $383 million. The defense and space unit also struggled, grappling with cost overruns and supply chain disruptions, leading to an operating loss of $527 million.
Consequently, the company reported a core loss of $0.82 per share in the last quarter, which is even worse than the core loss per share of $0.37 reported in Q2 2022. While Boeing has made progress compared to a couple of years ago, it's important to note that it still faces significant challenges and isn't yet operating as a fully healthy business.
Boeing has set ambitious yet achievable targets for its business in the coming years. The company aims to achieve significant improvement and plans to generate $100 billion in revenue with a 10% operating margin by 2025 or 2026. This target suggests an operating profit of $10 billion. Additionally, Boeing expects to increase its free cash flow to $10 billion, a considerable jump from the estimated $3 billion to $5 billion in 2023.
These targets seem realistic, especially for 2026, and potentially achievable even by 2025. Boeing's services business has been performing exceptionally well, and strong demand for aircraft will likely allow the company to increase production, supporting the margin recovery in its commercial jet segment. However, the challenge lies in stabilizing the struggling defense and space unit, which remains uncertain.
Despite trading at approximately 36 times the midpoint of its 2023 free cash flow estimate, the stock's valuation is less than 15 times the company's 2025-2026 free cash flow target. This suggests that if Boeing demonstrates tangible progress toward its medium-term objectives, the stock has the potential to continue its upward trajectory. Investors may be encouraged to anticipate further growth beyond 2026, leading to continued positive momentum in Boeing's stock price.
Despite Boeing's projected financial recovery, there are two significant reasons to be cautious about investing in Boeing stock at its current valuation. First, while the company has made progress in reducing its debt by over $10 billion from peak levels, it still carries approximately $40 billion more debt than it did five years ago. As a result, Boeing will need to dedicate all of its free cash flow to debt reduction until at least 2026 to improve its balance sheet. This means that the stock's performance will be solely dependent on changes in the company's market cap, with no boost from dividends or share buybacks. To achieve annualized returns of 10%, Boeing's market cap would have to reach around $200 billion by the end of 2026.
Second, while the current demand for aircraft surpasses supply, there are concerns that Boeing's management may be overly confident about the duration of this trend. Boeing plans to restore aircraft production to approximately pre-pandemic levels by 2026, but its rival Airbus aims to deliver more than 1,100 commercial jets annually by then, surpassing the previous record of 863 set in 2019.
Some optimistic investors believe that Boeing can also exceed pre-pandemic production rates by the late 2020s. However, air travel demand is showing signs of moderation in certain regions after a massive boom that began in 2022. If this trend continues, airlines may shift their focus from placing new aircraft orders to deferring or canceling existing ones. This scenario could make it challenging for Boeing to grow beyond its 2026 targets.
While Boeing is expected to return to profitability, increase cash flow, and improve its balance sheet over the next few years, these positive trends may fuel the stock's rally for some time. Nonetheless, investors should be aware that the recent surge in aircraft orders may eventually subside in the next few years, leading to limited prospects for Boeing's growth beyond 2026 and potentially deflating the value of Boeing stock.
As long as the price is above 224.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 238.47
- Take Profit 1: 245.00
- Take Profit 2: 255.00
Alternative scenario:
If the level of 224.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 224.10
- Take Profit 1: 215.40
- Take Profit 2: 208.00
