While 2020 saw a rip-roaring bull market – especially for those stocks in the red-hot tech space – things were not so good for those sectors hit hard by the pandemic. A prime example is Boeing (NYSE:BA) stock. The shares have gone from $337 to $216, with the market capitalization falling to about $122 billion.
Yet things could have been much worse for Boeing. Keep in mind that – during March – the stock price hit a low of $124. So yes, if you were brave enough to make a buy and held on, you would have had a nice gain.
A major catalyst is the success of the Covid-19 vaccines. The effectiveness of offerings from Pfizer (NYSE:PFE), BioNTech (NASDAQ:BNTX) and Moderna (NASDAQ:MRNA) significantly beat expectations. And while the roll out has been rocky, things will certainly improve.
But what now for Boeing stock? Can we continue to expect to see strong gains in the new year?
Well, let’s take a look:
The Diversification Advantage
Over the years, one of the criticisms of Boeing stock was its defense business. Shouldn’t the company instead be laser-focused on the commercial airline business?
Of course, the diversification strategy has turned out to be a big advantage with the pandemic. During the last quarter, the defense business generated a profit of $628 million. The company is a leader in developing fighter jets, helicopters, drones and space systems (Boeing is ranked No. 2 for defense contractors in the U.S.) Consider that the backlog is a hefty $62 billion for orders.
But unfortunately, the defense business has not been a panacea either. The revenues still account for less than a third of overall revenues. In other words, Boeing will need to show much more improvement with its commercial airline business — and this is not going to be easy.
What’s Next For Airline Travel?
U.S. air traffic has certainly been getting better. But the levels are still about 60% off from last year’s activity. According to Boeing’s own estimates, the passenger traffic is not expected to get back to normal levels until about three years from now.
Yet the wildcard is business travel. As companies have become accustomed to remote work, Zoom (NASDAQ:ZM) videoconferencing and virtual events, there may be a long-term reduction in in-person business travel. How important will it be to have lavish conferences or costly sales meetings? It seems reasonable that CFOs will be more stringent with these expenditures.
In the meantime, the airline industry will continue to be under much financial pressure – and this will make it more difficult to finance and purchase new aircraft.
OK then, what about the certification of the of the 737-MAX? This is certainly good news. Even though there have been more than 1,000 cancellations, the backlog remains at over 3,000 craft.
But the impact on the bottom line may be a disappointment. According to Credit Suisse analyst Robert Spingarn — in a recent research note — the production will lag deliveries well into 2023. Based on this, he estimates that the free cash flow per share come to $18.50 a year later. This is why his current target price on Boeing stock is $174, which is 19% below current levels.
Bottom Line On Boeing Stock
Another nagging issue is the balance sheet. To deal with the ballooning losses, Boeing has had to significantly increase its debt load, which is now at $61 billion.
The company has cut costs, which has included recent layoffs of about 11,000. But Boeing will probably need to do more – and this means raising equity in the stock markets. With the share price at much better levels, this is more palatable. But it will still be dilutive.
So while Boeing has done a good job so far, it will challenging to get back to growth. Thus, it’s probably best to hold off for now.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.
