2020 was not a great year for Boeing (NYSE:BA). The company already had its hands full from its safety scandals, then the novel coronavirus hit. However, things could have ended up much worse; by the end of the year, Boeing stock clawed back much of its prior losses.
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That’s because the price of Boeing stock now reflects two different issues. On the one hand, you have the global recovery effort from the novel coronavirus. Things are looking pretty good on that front. Admittedly, this has been a difficult winter in terms of the virus’ spread and in forcing new lockdowns and quarantines. However, it appears that vaccines will be widely-available in the near future. This should allow the airline industry to reach a much better place by mid-2021.
On the other hand, Boeing has its own specific corporate and cultural issues to worry about. These have gone on the back burner to some extent as the pandemic caused broader problems for the travel industry. However, Boeing still has more to do in winning back the confidence of consumers and regulators.
Airlines and Boeing: How Quickly Will They Recover?
The International Air Transport Association (IATA) released its updated outlook for the airline industry in November. The agency sees airlines, as a global collective, losing $119 billion in 2020 when all is said and done. That figure, the IATA estimates, will be pared down to a $39 billion loss for full-year 2021. That shows the extent of the recovery; airline losses will be around just one-third of 2020’s horrible levels. Still, it will be awhile until the industry is back to breakeven. Making matters worse, the IATA had previously estimated a $15 billion loss for 2021 as of June 2020. So the latest projection is a sharp turn downward.
However, it’s not all bad news as far as Boeing is concerned. Boeing has a strong product line-up in narrow-body jets that are more in favor among discount carriers for regional and national routes. That’s as opposed to the massive planes that primarily serve transcontinental routes. Boeing thus should get a fair chunk of business as the world recovers from the pandemic, as its narrow-body planes are likely to be in higher demand than the long-haul jets where Airbus has compelling offerings.
Boeing’s earnings are in turn correlated with the airline industry comeback. Boeing had a huge operating loss this year and paused the dividend among other measures to keep debt in check. Next year, analysts see the company earning less than $3 a share, which is rather limited for a $200 stock. In 2022, if analysts are correct, Boeing will earn more than $7 per share. While that is much-improved, it’d still put Boeing stock at a pricey 28x P/E ratio. That’s not an issue for longer-term investors willing to wait until 2023 or beyond when earnings make a full comeback to pre-crisis levels. However, the diminished earnings power will likely cap short-term stock price gains.
Recertification & China
Boeing has gotten the 737 MAX recertified for air travel in the United States. This is obviously a critical step in getting the company’s business back on track. That said, it’s far from the only thing needed for Boeing to make a full recovery. Another key thing will be ending the two-year prohibition on MAX flights in Europe. This appears set to happen later this month.
Finally, there’s China, where Boeing also needs to get recertified. Things are more complicated there, as political issues play a role as well. Tensions between China and the U.S. have been rising in recent years, and things are coming to a head now. The New York Stock Exchange will be delisting various leading Chinese telecom companies in coming days for regulatory non-compliance and purported national security risk. This comes as part of a broader crackdown on Chinese firms in the United States.
While it’s not clear what exactly China will do to retaliate, Boeing would be a logical bargaining chip. The U.S.’ aerospace industry is one of its most important and prestigious ones. Beijing could cause some serious jitters by rerouting orders to Airbus (OTCMKTS:EADSY) until political winds change. Tensions may ease with President Biden soon set to take office. Still, the diplomatic conflict between the U.S. and China is boiling over right now, and that’s an alarming state of affairs for Boeing in particular.
Boeing Stock Verdict
If you’re a patient long-term investor, Boeing stock looks like a fine choice here. Through the course of 2021, shares should be able to move higher. Particularly with the MAX starting to regain regulatory compliance, Boeing’s big picture is improving.
That said, it’s not going to be an overnight return to normal. Even assuming the vaccines are broadly effective and widely distributed, it will take time for normal air traffic to stabilize. Some business travel, in particular, may never regain the full level of demand that it had prior to Covid-19. And airlines’ balance sheets have been greatly harmed by 2020’s unprecedented losses. Thus, it will take a few years for the airlines to reorder planes in large numbers and get Boeing’s backlog back up.
However, Boeing appears to be able to endure even a sustained dip in new plane demand. The company avoided the most catastrophic outcomes from its MAX safety scandals, and the Covid-19 recovery is coming along reasonably quickly as well. This isn’t the sort of set-up that gets Boeing stock back up to its all-time high of more than $425/share anytime soon. However, the stock could advance from the current $214 up to $250 or $300 by the end of this year assuming current favorable trends continue.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
