Defense and Space Segment To Support Boeing’s First Quarter Earnings

As air travel demand regained momentum over the past two months, the CDC identified two additional coronavirus mutations as variants of concern. Currently, TSA checkpoint figures remain 36% below 2019 levels – highlighting a strong recovery in air travel demand. With the lifting of the FAA’s ban on MAX aircraft, Boeing (NYSE: BA) has been making requisite changes in its grounded fleet. The company has a 400+ aircraft inventory and  is likely to ramp up the 737 MAX production during the latter half of the year. While multiple coronavirus strains remain a near-term concern for the travel industry, Boeing’s low production numbers and declining inventory levels are likely to ease its heavy balance sheet. As the production rate in 2021 is likely to remain lower than last year, the company’s top line is expected to sequentially contract in Q1 2021. We highlight quarterly revenue trends for the company along with our estimates for Q1 2021 and the full-year 2021 in an interactive dashboard, Boeing Earnings Preview.

Huge 737 MAX order backlog despite production issues

Per latest reports, Boeing’s order backlog of 4,000 commercial airplanes includes 3,240 737s, 263 777s, and 442 787s. The Commercial Airplane segment alone accounts for 80% of the total $363 billion order backlog. While the Commercial segment’s order backlog decreased from $377 billion in Q4 2019 to $281 billion in Q4 2020, the lifting of the MAX ban and declining coronavirus cases in the U.S. are likely to push demand for Boeing aircraft.

Despite a prolonged headwind faced by the commercial segment, the company’s defense and space business contributed more than 40% of the top line last year. With the growing interest in space business and multi-year defense contracts, the segment is likely to observe another year of stable revenue and earnings expansion.

With easing of inventory levels, Boeing stock has an upside potential

Boeing’s long-term debt soared from $10 billion in 2018 to $62 billion in 2020 as inventories piled-up and the company raised capital to tackle any adverse pandemic scenario. Inventories observed a $20 billion jump from $62.5 billion in 2018 to $82 billion in 2020. As the balance sheet holds $25 billion of cash and short-term investments – the jump in long-term debt obligations is primarily due to high inventory levels. The stock’s market capitalization is $60 billion lower than pre-Covid levels and we believe that there is a sizable upside in the stock as inventory pressure eases.

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