Boeing’s (NYSE:BA) shares have been appreciating after the release of the latest earnings results for Q3. There are reasons to believe that the shares have everything going for them to continue to rise as most of the major risks that disrupted the company’s business in the past are slowly subsiding. I have already mentioned back in September that China-related challenges are likely to be a thing of the past as the rising air travel demand is likely to prompt Beijing to approve the deliveries of Boeing planes to China, which were prohibited in the country after the disastrous events that involved 737 MAXs in 2019.
Considering this and the fact that the demand for Boeing planes is on the rise in other markets as well, it becomes obvious that the worst for the company is likely behind it. That’s one of the main reasons why I’ve recently opened a long position in Boeing and have no plans to unwind my position anytime soon.
Recovery From The 737 MAX Fiasco Is Underway
A couple of weeks ago, Boeing reported its Q3 earnings results which showed that the company generated $18.1 billion in revenues, below the estimates by $200 million, but still up 13.4% Y/Y. At the same time, the non-GAAP EPS stood at -$3.26, below the estimates by $0.65.
Despite such results, the company still reaffirmed its guidance and is expected to generate $3 billion to $5 billion in FCF this fiscal year. This means that we should expect a major improvement in performance in Q4 since in the first nine months of FY23 Boeing generated $1.43 billion in FCF.
The good news is that there are indeed reasons for optimism going forward as Boeing has more than enough growth opportunities to exceed expectations in the future as there’s an indication that the recovery from the 737 MAX fiasco is finally underway.
Let’s not ignore the fact that Boeing recently secured 398 commercial net orders and ended Q3 with $392 billion in backlog. This should be more than enough to ensure that its business continues to generate decent returns in the following years. At the same time, if the company manages to meet its goal of producing 38 737 planes per month by the end of the year, then it will be able to improve its overall efficiency, which should positively affect its financials in the foreseeable future. What’s more is that the further improvement of the air travel demand, which soon is expected to exceed the pre-pandemic levels, will likely result in a rise in new orders from various airlines across the globe and benefit Boeing in the long run.
Another important thing that needs to be mentioned is that several days ago it was reported that Boeing plans to resume its manufacturing operations in China. This might indicate that the resumption of deliveries of 737 MAXs to the country is around the corner as the rising air travel demand in China is likely to prompt Beijing to once again work with the American-based aircraft maker to meet that demand. There are expectations that this might happen next week after the meeting of President Biden and President Xi Jinping on the sidelines of the upcoming APEC summit in San Francisco. Add to all of this the fact that Boeing is aggressively expanding in other global markets to mitigate Chinese-related risks and it becomes obvious that the worst for the company is likely finally behind it.
Considering that the macro and geopolitical risks for Boeing subside as tensions ease and air travel recovers, there are reasons to believe that the company’s stock offers a significant upside at the current price. Although Boeing missed its expectations in Q3, the street still believes that its business would be able to grow at a double-digit rate in FY23 and beyond. I share the same optimism and back in September I published my DCF model which showed that the company’s fair value is $231.05 per share, which represents an upside of ~20% from the current price.
Since nothing major has happened since that time which could’ve significantly altered my assumptions in that model, it makes sense to think that such an upside is still justified. Add to this the fact that the assumptions in that model are closely aligned with the current street estimates, while the consensus currently is that the upside could be as high as ~22%, and it becomes obvious that Boeing is likely undervalued and its shares are an attractive investment at the moment.
Risks To Consider
Even if the worst for Boeing is behind it while its excessive backlog ensures that it’s able to stay afloat and meet the rising demand for new planes from the airlines, there are nevertheless several macro risks that could make it harder for the company to accelerate the pace of its recovery.
First of all, as we’re still far away from the targeted 2% inflation rate, the Federal Reserve could decide to continue to hike rates and keep them higher for longer, which could after all result in a recession that didn’t happen in recent quarters due to various fiscal stimulus programs. Such a scenario could prevent a further rise in demand for air travel and make airlines slow down the process of ordering new planes.
At the same time, global capital continues to leave China en masse and recently foreign direct investments went to negative levels for the first time in decades as the Western countries continue to decrease their exposure to China to minimize geopolitical risks. Add to all of this the fact that the Chinese exports recently decreased as well and it becomes obvious that the growth of the Chinese economy could slow down, which could have a negative impact on the global economy and affect the aviation industry as well. The good news though is that there are also reasons to believe that those risks won’t fully materialize in the following quarters.
The Bottom Line
After struggling to mitigate the 737 MAX-related issues in recent years, it appears that Boeing has finally managed to put its business on the path of recovery. The rise of the international air travel demand along with the potential improvement of Sino-American relations at the upcoming economic summit could very well result in Boeing’s full return to China and the improvement of its financials, which could lead to the further appreciation of the company’s shares. While some geopolitical risks will haunt Boeing for years to come, it’s likely that in the short to near term, it will be able to mitigate most of the major risks. That’s one of the main reasons why I’ve recently added the company’s shares to my portfolio as it appears that the momentum is on Boeing’s side for now.