Boeing (NYSE:BA) has been in a downward spiral since early March as the company has dealt with the fallout from fatal crashes involving the company’s 737 Max 8 planes. Things have been downright ugly for Boeing stock.
As Boeing dropped from $450 in early March to $320 by mid-August, I said time and time again (read here, here, here, and here) that the best move is to avoid Boeing stock for the time being. The idea was that there were still more shoes to drop in the 737 MAX crisis, and those shoe drops would continue to weigh on BA stock.
Now, here we are at the end of August with BA stock still down big, and I think it’s time to finally buy the dip.
Why? It feels like the last shoe has dropped in the 737 MAX crisis. The recent news flow suggests that Boeing is on track to get 737 planes back in the air by end of 2019 and resume new production of the plane by early 2020. So long as that remains the most likely time-table, investors will want to buy the dip in Boeing stock ahead of those catalysts.
At the same time, BA stock is trading at an appropriately discounted valuation which leaves plenty of room for potential upside in the event things do get back to normal by 2020 (which I expect them to).
The investment implication? Buy the dip in BA stock. The worst appears to be over, and the best is yet to come.
The Worst Appears to Be Over
In the wake of the 737 MAX crisis, my general thesis on BA stock has been that Boeing had turned into the 2019 version of 2018 Facebook (NASDAQ:FB).
That is to say, both companies were hit hard by a headline scandal that created horrible optics but didn’t really impact the long term fundamentals. Facebook stock didn’t rebound until those optics improved. My theory was that, similarly, Boeing stock wouldn’t rebound until its optics improved.
It appears that the optics are finally starting to improve, and the worst is in the rear-view mirror. Specifically, from March to July, we were getting new news on the 737 MAX crisis seemingly every single day, and all that new news amounted to significant uncertainty as to when exactly Boeing would get its 737 planes back in the air, and when production would resume.
Since the company’s July 24 earnings call, though, it’s been awfully quiet on the 737 news front. The only news we have received is good news (see here, here, and here), the sum of which implies that Boeing will get 737 MAX planes back in the air by late 2019, and will resume 737 production by early 2020.
Thus, it increasingly appears that the last shoe has dropped in the 737 MAX crisis, and that the worst is in the rear-view mirror. Going forward, Boeing is on a visible pathway to getting operations “back to normal”, and as Boeing glides on that path, investors will grow increasingly optimistic about buying the dip in Boeing stock.
The Best Is Yet to Come
To be sure, some of the rebound rally in Boeing has already played out. The stock bottomed in mid-August at $320. It has since rallied more than 10% to above $350.
But, the best of the rebound rally is yet to come.
Fiscal 2020 EPS estimates for Boeing sit around $22.50. The five-year-average forward earnings multiple on BA stock is around 20. Investor sentiment surrounding BA stock should normalize as the company gets its 737 planes back in the air in late 2019, and resumes production in early 2020. That normalization should push BA stock’s multiple back to its long term norm.
Just look at Facebook. In late 2018, it’s forward earnings multiple plunged to below 17. Today, the forward earnings multiple has expanded back to above 20 – which is average for growth stocks.
Thus, you will likely get similar normalization in Boeing’s valuation. Let’s say the forward earnings multiple rebounds to is long term average of 20. A 20-times forward multiple on $22.50 in fiscal 2020 projected EPS implies a fiscal 2019 price target of $450.
Sure, Boeing stock probably won’t rebound back to a 20-times forward multiple with global growth cooling and trade tensions heating up. But, 17- or 18-times seems fairly likely. That still implies a 2019 price target of $380 to $400, which translates into ~10% upside from current levels.
Bottom Line on Boeing Stock
It appears the last shoe has dropped in the 737 MAX crisis, meaning that the worst is over for BA stock. As the optics surrounding this company improve over the next several months and as a resolution to the 737 MAX crisis gains visibility, investors will increasingly buy into what has become a discounted BA stock.
This buying will ultimately propel Boeing meaningfully higher over the next few months, meaning that now is the time to buy the dip in BA stock.
As of this writing, Luke Lango was long BA and FB.
