VALUATION HIGHLIGHTS

1. Commercial Airplanes constitute 40% of the Trefis price estimate for Boeing's stock.
2. Global Services constitute 39% of the Trefis price estimate for Boeing's stock.
3. Defense, Space & Security Systems constitute 20% of the Trefis price estimate for Boeing's stock.

WHAT HAS CHANGED?

BA Stock Performance

BA stock has seen little change, moving slightly from levels of $215 in early January 2021 to around $210 now (early Feb 2024), vs. an increase of about 35% for the S&P 500 over this roughly 3-year period.

Overall, the performance of BA stock with respect to the index has been lackluster. Returns for the stock were -6% in 2021, -5% in 2022, and 37% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that BA underperformed the S&P in 2021.

Latest Quarterly Performance

Boeing reported its Q4 2023 results on January 31, 2024. Total revenue of $22.0 billion was up 10% y-o-y, primarily due to a strong 13% rise in sales for its commercial airplanes business. The company delivered 157 airplanes in Q4, reflecting a 3% y-o-y rise. Its loss of $0.47 on a per share and adjusted basis compares with a loss per share of $1.75 in the prior-year quarter.

Strong Demand Outlook

Per Boeing's commercial market outlook, global passenger traffic will likely grow at an annual rate of 4% over the next two decades.

The company estimates that there will be 43,000 global deliveries of new aircraft, with a strong demand for single-aisle aircraft. Interestingly, Boeing has an order backlog of 4,200 planes, with 737 MAX accounting for around 80% of the units.

Due to the coronavirus pandemic and the suspension of MAX's production, the company's total order backlog declined from $463 billion in 2019 to $363 billion in 2020 before rising to $411 billion now.

However, the passenger numbers at TSA checkpoints have consistently remained strong in the recent past.

Moreover, the company highlighted in the commercial market outlook that aircraft retirement rates increase after a financial crisis, as observed after the Great Recession and SARS outbreak, implying a strong likelihood of new orders for Boeing aircraft in the coming years.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are the key drivers of Boeing's value that present opportunities for upside or downside:

Commercial Airplanes EBITDA Margin

Commercial Airplanes EBITDA margin stood at -5.3% in 2022. We expect the division's margins to increase to 15% over the Trefis forecast period. If margins were to expand at a slower pace to 8% by the end of our forecast period due to the stiff price competition from Airbus and development or delivery delays of 737-MAX, there could be a potential downside of about 15% to Trefis price estimate for Boeing's stock.

Boeing's New Airplane Deliveries

Boeing commercial aircraft deliveries declined from 748 in 2016 to 157 in 2020 due to the grounding of the 737 MAX and the impact of the pandemic. However, it rebounded to 480 in 2022, and we forecast it to rise to over 800 by the end of our review period in 2029.

If, however, due to increased competition from regional jet makers Bombardier and Embraer and the entry of new players such as China's Comac, Russia's Irkut, and Mitsubishi's Regional Jet, Boeing's deliveries expand only to 600, there could be a potential downside of about 15% to Trefis price estimate for Boeing's stock.

BUSINESS SUMMARY

Boeing is one of the two major manufacturers of 100+ seat aircraft for the global commercial airplane industry. The other major airplane maker in this category is Airbus. Boeing designs, develops, manufactures, sells, and services commercial jetliners such as the single-aisle 737, and twin-aisle 777, 787, and 747.

Apart from commercial aviation, Boeing has a defense contracting business. The company is the second-largest defense contractor of the U.S. government after Lockheed Martin.

To promote sales of its commercial airplanes, Boeing offers leasing solutions to airlines through its Boeing Capital Corporation (BCC) segment.

SOURCES OF VALUE

The commercial airplanes division is the largest contributor to Boeing's total value. The key factors responsible for this are:

Established position as one of the two largest aircraft manufacturers

Aircraft manufacturing requires significant upfront capital and research and development expenditure. Boeing has made these investments over the last several decades to establish itself as one of the largest commercial aircraft manufacturers.

A large number of airlines in the world operate Boeing airplanes. These airlines have a long, established relationship with Boeing as their airplane provider.

Other companies, including Embraer, Bombardier, Comac, Russian Irkut, and Mitsubishi are looking to play a larger role as commercial airplane manufacturers face enormous competition from both Boeing and Airbus. In contrast, airlines have a working relationship with Boeing and Airbus for most of their airplanes. This track record and existing relationships provide both Boeing and Airbus with a significant competitive advantage over smaller and relatively new airplane makers.

KEY TRENDS

Aircraft demand is strongly tied to global economic growth

A decline in passenger and cargo traffic due to the global recession in 2009 adversely impacted revenues/margins for commercial airlines the world over. This, in turn, affected aircraft demand. Post-pandemic, the global economy has steadily grown, and airlines have seen their revenue rise and improve margins. This has enabled airlines to place orders for new airplanes, growing results for airplane makers such as Boeing.

However, there are fears of a potential recession, which may result in air carriers and governments delaying or canceling orders for new aircraft.

Expansion of low-cost airlines (LCC) is boosting growth in the single-aisle airplane segment

Low-cost airlines or carriers (LCC) are fast expanding around the world. They provide an alternative to other modes of transportation, such as railways.

LCCs typically use single-aisle aircraft such as Boeing's 737 and Airbus' A320. The growth of LCCs is primarily a consequence of increased liberalization in the commercial aviation industry that has reduced entry barriers for private players. This is especially true in the emerging countries of the Asia-Pacific region, where liberalization driven by the Association of Southeast Asian Nations (ASEAN) has boosted the growth of many LCCs. We expect regulatory hurdles in the commercial airline industry to continue to decline the world over, paving for the growth of LCCs. And the expansion of LCCs will boost demand for single-aisle airplanes. The company estimates that there will be a demand for over 37,000 aircraft over the next two decades.

Unionized workforce

Unions represent over 40% of Boeing's total workforce. The company experienced a workforce stoppage in 2008 due to the IAM (International Association of Machinists and Aerospace Workers) strike. Similar stoppages in the future have the potential to significantly impact the business through production delays and the development of Boeing's products and services.

Boeing's defense business is highly dependent on U.S. military spending

Boeing generates about 80% of its defense, space, and security (DSS) division revenues from the US government through its various agencies such as the Department of Defense and NASA. Owing to this high degree of dependence on the U.S. government, Boeing is vulnerable to any cuts in the government's military spending.