After Earnings, Is Boeing Stock a Buy, a Sell, or Fairly Valued?

Boeing BA released its first-quarter earnings report on April 24. Here’s Morningstar’s take on Boeing’s earnings and the outlook for its stock.

Key Morningstar Metrics for Boeing

• Fair Value Estimate: $221.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Fair Value Uncertainty: High

What We Thought of Boeing’s Q1 Earnings

• CEO David Calhoun described Boeing as asserting control over its manufacturing discipline, partly prodded by the Federal Aviation Administration’s mandate to publish a safe manufacturing plan by late May.
• Getting the 737 assembly line back on track is the biggest priority, and we estimate that the plane accounts for about half the company’s value.
• Management confirmed they are in talks to acquire Spirit AeroSystems. That company used to be part of Boeing, makes most of the 737 fuselage, and has been having difficulty picking up the pace and with its quality control.
• The company is using up some cash in the first half of 2024, and it mentioned liquidity options that make news about it signing a $10 billion debt deal unsurprising.
• We think the company can get back on its feet within a year or so, and there is currently some pessimism in its share price.

Fair Value Estimate for Boeing Stock

With its 4-star rating, we believe Boeing’s stock is undervalued compared with our long-term fair value estimate of $221 per share, representing an equity value 33 times our 2025 adjusted EBITDA estimate and 2 times our 2025 sales estimate. We think the enormous special charges and fleet groundings are mostly behind Boeing, and we forecast one or two more years of hard slogging as it clears up manufacturing and supply chain issues. Our valuation includes healthy long-term global demand for Boeing’s products, successful scaling-up of deliveries, and margins on its bread-and-butter 737 and 787 models in the 2026-27 timeframe.

The covid-19 crisis shocked the aviation industry and essentially halved global revenue passenger kilometers in 2020. Beyond the pandemic and lingering manufacturing headaches, we assume there will be a replacement cycle among most airlines, and that the vast majority of fleet growth will be from narrow-body aircraft as an emerging-market middle class demands more short-haul and point-to-point medium-haul travel.

We anticipate it will take until mid-2025 for Boeing to stabilize its manufacturing processes and certify that its planes are consistently built to its specified design and safety standards. In the longer term, we expect the mix shift toward the high-margin 737 MAX and an eventual return to learning-curve-based cost efficiencies will help the company improve margins.

Read more about Boeing’s fair value estimate.

Economic Moat Rating

We think Boeing merits a wide moat because it benefits from durable intangible assets and switching costs. Though the company has taken some competitive hits in the commercial aerospace duopoly, that market is large enough and so difficult to break into that it supports two wide-moat aircraft manufacturers.

We think Boeing’s defense business is more exposed to operational risk than peers due to its higher exposure to fixed-price contracts, but the firm is turning a corner operationally. It benefits from intangible assets stemming from the technical complexity of its products, switching costs from the time and effort the military faces to switch suppliers, and a lack of viable alternative suppliers. We think Boeing Global Services possesses intangible assets from proprietary access to aftermarket part designs, as the FAA and other regulators require that spare parts be identical to original designs. The segment also benefits from switching costs stemming from a lack of alternative suppliers for such parts.

In the commercial aircraft manufacturing segment, we believe the technical complexity of aircraft manufacturing and the extensive regulatory barriers to entering the market constitute wide-moat-caliber intangible assets. Boeing and Airbus benefit from these barriers to entry. They operate in a duopoly in the global large-frame jet aircraft market, and we expect virtually all global revenue associated with air travel growth will continue to flow through these two incumbents’ top lines. What’s more, we estimate demand from airlines for their products will remain high enough for long enough that we expect both firms to generate economic profits for decades.

Read more about Boeing’s economic moat.

Financial Strength

Boeing’s capitalization suffered the brunt of the last three years’ turmoil. To keep the lights on, the company borrowed over $40 billion and suspended dividends and share purchases. The firm ended 2023 with about $52 billion in debt and $16 billion in cash—$4 billion less net debt than at the end of 2022. With each delivery of one of its major aircraft, Boeing can improve cash flow.

The first capital allocation priority is to reduce debt, but the company will face important trade-offs, as it must also reinvest in new technology to remain competitive. We think the correct balance between debt reduction and reinvestment is the critical question management needs to address.

Read more about Boeing’s financial strength.

Risk and Uncertainty

We think Boeing’s biggest risks are macro risks that limit demand and operational risks that constrain supply, both of which it has suffered over the last three years. We think Boeing deserves a High Uncertainty Rating, but note that it is still working through much higher supply risks than Airbus as it revives 737 MAX and 787 production and deliveries.

The pandemic dramatically reduced air travel and aircraft deliveries. Trade group IATA reported that passenger demand declined by nearly two-thirds in 2020. While travel has returned to pre-pandemic levels in many markets, its recovery is still patchy and may face renewed disruption. China is a major aviation market, and notwithstanding the recertification of the 737 MAX there and resumed deliveries of new planes in due course, we suspect it may be easier (if not simply more expedient) for local airlines to substitute future marginal orders of 737s for Comac C919s while maintaining or growing their share of orders for Airbus narrow-bodies.

Boeing’s execution of its commercial jets’ extraordinarily complex manufacturing process poses a risk to its results, as numerous errors and lapses in quality emerged between 2020 and 2024. In the aftermath of the 737 MAX grounding and production rework on the 787, a second major risk lies in global supply chain disruptions that affect Boeing’s engine and subsystem suppliers. These suppliers may not be able to ramp up production at Boeing’s desired pace, which would constrain or delay the firm’s ability to get its assembly up to the volume where it makes money on every plane it delivers, versus having to continue to record extraordinary charges for idle assembly capacity.

Read more about Boeing’s risk and uncertainty.

BA Bulls Say

• Boeing has a large backlog that covers several years of production for the most popular aircraft, which gives us confidence in aggregate demand for aerospace products.
• Boeing is well-positioned to benefit from emerging-market growth in revenue passenger kilometers and a robust developed-market replacement cycle over the next two decades.
• We expect commercial airframe manufacturing to remain a duopoly for most of the world for the foreseeable future. We think customers will not have any meaningful options other than relying on incumbent aircraft suppliers.

BA Bears Say

• Boeing’s reputation for engineering prowess may have taken a permanent hit since repeated manufacturing flaws in 737 MAX jets have hampered its assembly pace and disrupted airline and passenger schedules.
• In the long term, changed consumer behavior, especially among business travelers, could be unfavorable for aviation.
• Aircraft development is susceptible to development delays, hiccups, and cost overruns.

This article was compiled by Oratile Matome.