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Underperforming Boeing Stock Looks Set For 50% Upside As Outlook Improves

Boeing (NYSE:BA) stock has been a mixed bag for awhile. The company’s quasi-monopolistic market position and strong defense contracts remain huge benefits. Yet BA stock is down 2.9% this year.

Boeing (BA) passenger airplane with open exit door, passenger windows, cargo door, close up view of Boeing logo
Source: vaalaa / Shutterstock.com

Boeing has been slammed by not one but two massive problems. The manufacturer is in a better position than many aviation and aerospace companies to ride out the pandemic. Still, it’s not immune to weakness as its customers — the airlines — have to downsize.

And then you’ve got the self-inflicted problem: Boeing’s safety scandal and its poor handling of that situation subsequent to the deadly 737 MAX crashes. With both those factors in play, many investors have steered clear of Boeing stock.

As if that weren’t enough, BA stock lost altitude once again last week following a downbeat earnings report. The company announced a huge loss and uninspiring forward guidance on top of that.

Yet, despite all the issues, there’s actually more reason for optimism on BA stock. How could that be given all the uncertainty at the moment? Read on.

Earnings Report Was Better Than It Seems

Looking at the headline earnings numbers from Q4, you might think that Boeing was in deep trouble. But, as always, keep an eye out for one-time losses.

By the numbers, Boeing lost more than $8 billion, or $14 per share, in Q4 of 2020. However, the lion’s share of that, $6.5 billion, came from the company writing down a portion of the value of its 777x jetliner program. That’s understandable given the slowdown in the aviation market and orders going forward.

However, that’s water under the bridge; Boeing invested the money in that 777x program many years ago. It isn’t costing the company any actual cash today that its investments from eons ago failed to deliver as much profit as anticipated.

The company’s operating results and cash flow were only moderately worse than the same quarter last year, which was, of course, before the pandemic started. And in any case, the focus on trailing results is a bit misleading at this point since Boeing has largely secured approval for the 737 MAX to fly again.

The MAX Takes Flight

Obviously, the huge problem for Boeing in recent years has been the lingering safety questions around the Boeing 737 MAX. However, this quarter’s results showed that Boeing has turned the corner.

It has already received approval for recertifying the MAX again in most major aviation markets including the U.S., Europe, Canada, and Europe. The MAX is still missing approval in China, but otherwise, regulators are largely back on board again.

We saw the fruits of that this quarter, with Boeing actually delivering 27 of the model to airlines this past quarter. While the scandal discount still lingers, the MAX is indeed back.

Recent Debt Offer Seen as Positive

Boeing kicked off February with a sale of more than $9.8 billion in fresh debt to investors. This will help it refinance current obligations. It has taken on much more debt since the pandemic to cover its short-term loss of cash flow.

Investors might look at Boeing tacking on another $10 billion and grow concerned. I’d argue the opposite point, however.

In fact, this deal shows that Boeing still has the firm support of the capital markets. According to the report, Boeing will have to pay just a 175-basis-point premium to U.S. Treasuries for access to this capital. That came at a cheaper price than analysts had initially expected.

Furthermore, given where Treasuries trade overall, this means that Boeing can borrow money at a 3-4% interest rate, despite the pandemic and the scandals and the resulting hits to its credit rating.

Sector Dynamics Face Headwinds

In the past, Boeing’s underperformance was more related to its own safety scandals. Now, though, as things are improving, BA stock has still underwhelmed.

There’s one big reason for this. It’s that the broader exchange-traded funded (ETF) for the sector: the SPDR S&P Aerospace & Defense ETF (NYSEARCA:XAR) has been flying into a headwind lately. That headwind, namely, is the new administration in Washington.

The defense industry fared well as the Trump administration spent heavily on modernizing the military. Traders think this may change under President Biden. I’m skeptical on that point, given Biden’s hawkish historical voting record. In any case, the Aerospace & Defense ETF has only gained 4% over the past year. That trails the S&P 500 index that is up more than 16% over the same period. With BA stock down more than 39% in that period, people buying into the shares at this point benefit from the broader discount going on in the defense stocks.

BA Stock Verdict

I’ve taken awhile to come around on the BA stock story. However, I’m just about there now. Defense stocks have fallen out of favor with the swing to the Biden administration.

Recently, I have been buying defense stocks that don’t have the same scandal issues that Boeing has. However, for fans of Boeing’s business model and who trust the management team, this looks like a more than reasonable entry point. As the economy reopens and aviation demand returns, BA stock could easily glide toward $300 per share by year-end.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2021/02/ba-stock-could-soar-to-300-share-by-the-end-of-2021/.

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