Boeing (BA) — which earns our highest 5-STAR buy rating — is the world’s largest producer of commercial aircraft as well as one of the primary U.S. defense and space contractors, explains analyst Colin Scarola in CFRA Research's flagship newsletter, The Outlook.
We expect Boeing to generate a robust earnings recovery during 2023-2024, even in a recession environment and despite its bloated debt burden since the pandemic. This should result in attractive returns for the currently depressed shares, especially relative to a broader market that seems likely to continue struggling against a difficult macroeconomic backdrop.
The primary drivers of our strong recovery outlook for Boeing are as follows: 1) orders are already in place for commercial aircraft deliveries to grow roughly 25% Y/Y in 2023, regardless of recession, if Boeing’s supply chain cooperates; and 2) leading indicators are now pointing to the supply chain being able to accommodate a major acceleration in Boeing production.
A global recession is certainly a high risk during 2023, but Boeing is already delivering aircraft well below extreme recession conditions due to supply chain and still lingering labor problems.
However, with the pandemic moving into the rear-view mirror globally, we think it is now safe to assume a 2023 non-pandemic recession would be no worse for aircraft demand than the 2008-2009 recession.
But to provide a wide margin of safety, we assume a recession scenario would cause a 25% drop in plane demand from the 2018 peak, leaving Boeing with demand for about 605 planes in 2023. Importantly, this extreme recession scenario is 26% above Boeing’s current run rate of 480 planes per year.
The gist here is that the supply chain situation has been so bad in 2022 that Boeing is currently delivering well below what it would be doing in an exceptionally severe recession, but with a normal supply chain. Boeing’s backlog supports the notion that it is the supply chain and production problems, not demand, holding back deliveries.
The question becomes, then, can the Boeing supply chain support a big production ramp during 2023-2024? We think the answer is yes. The key data point indicating the aerospace supply chain is ready to support production ramp-up at Boeing is recent deliveries of GE Aviation LEAP engines — the leading powerplant for modern narrow-body planes and the recent primary supply chain hold-up for both Boeing and Airbus.
With healthy order levels and LEAP deliveries back near pre-pandemic levels, we expect Boeing to make a big step-up in EPS next year, moving from a net loss in 2022 to EPS of $4.94 in 2023 and $8.71 in 2024. These estimates are each roughly $2 above consensus, as we think the sell-side is yet to appreciate the strides the commercial aircraft supply chain is making, which will result in attractive upside for shares in the next year.
Our 12-month target price for Boeing shares is $230, which may look aggressive relative to the current stock price. But our target comes from a highly conservative valuation model where Boeing free cash flow recovers to only $10 billion (down 27% vs. 2018 peak) and not until 2027.
