Usually, when a quality company like Boeing (NYSE:BA) is trading at levels not seen for more than two years, I’d be shouting from the rooftops that BA stock is a screaming buy.
In this case, because the coronavirus from China has the potential to put the entire global economy into recession, combined with the massive losses Boeing’s generated as a result of the 737 Max debacle, it’s not nearly as easy to say with certainty that the aircraft manufacturer’s stock has a promising future.
No one knows what the future holds for Boeing or the markets as a whole.
However, if you’re an aggressive investor, the current coronavirus-led correction ought to provide you with an excellent entry point that, in five years, will look like a blessing in disguise.
BA Stock to Hit $400
I have to give credit to InvestorPlace contributor Ian Cooper for having the courage to recently suggest Boeing’s stock could hit $400 before 2021. As I write this, Boeing is down almost 5% on the day and trading below $275, less than $6 from a 27-month low.
If my colleague is right, and you buy in or around $275, that’s 45% upside over the next 10 months. That’s not a bad return for a stock that has a one-year total return of -32% through Feb. 27.
Cooper’s argument, along with analysis from several analysts, is based around the 737 Max returning to service by June or July. If that happens, a massive burden will have been lifted from Boeing’s shoulders.
As its airline customers return the grounded plane to regular flight service, it’s impossible to overestimate the psychological boost to the company, its employees, the company’s customers and parts suppliers, and especially investors, who’ve sent BA stock to the penalty box over the past year.
Free Cash Flow Is King
Cooper also refers to the fact that Boeing will be able to ramp up production of the 737 Max without spending additional capital beyond what it has historically budgeted for the plane’s production
If so, this means the company should be able to quickly replenish free cash flow, which took a brutal turn for the worse in 2019, dropping 131% to -$4.3 billion from $13.6 billion a year earlier.
In late March 2019, I discussed Boeing stock in light of the two recent 737 Max 8 plane crashes.
“Boeing might be up to its eyeballs in bad PR at the moment, but it can work its way back into the hearts and minds of travelers by merely doing what’s right. The rest will take care of itself,” I wrote on Mar. 29, 2019.
I went on to discuss the pros and cons of Boeing compared to Airbus (OTCMKTS:EADSY) at the moment in time. Little did I know that the company’s situation would go from bad to worse, ultimately costing former CEO Dennis Muilenburg his job just two days before Christmas. He was replaced as CEO by Boeing’s chairman, David Calhoun.
I don’t feel sorry for Muilenburg. He got more than $60 million in pension benefits and stock as a parting gift.
For me, it was disappointing to hear about the poor corporate culture that developed under Muilenburg. It’s a lesson for investors that things aren’t always as rosy as they appear. Investor relations and corporate communications big wigs ensure that we only see the highly edited version.
What lies behind the curtain is often a poor replica. I don’t believe that’s the case with Boeing. It can recover from this crisis with transparent leadership. We’ll know more about its transformation in the months ahead.
The Bottom Line
In the meantime, it is trading at or near its lowest level in more than two years. If Boeing can get back to annual free cash flow generation of $10 billion or more, based on a current enterprise value of $179 billion, we’re looking at a free cash flow yield of 6%, very close to where it was before the two crashes.
I don’t know if BA stock can get to $400, but it at least ought to be able to climb back into the $300s by June or July when the planes are expected back in the skies.
That’s a risk/reward proposition worth betting on. At these prices, Boeing is a buy.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.