Are Odds In Favor Of Boeing Stock?

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BA: The Boeing Company logo
BA
The Boeing Company

Fear of another infectious wave has again affected international travel with the imposition of stringent testing rules by many countries. However, the passenger numbers at TSA checkpoints remain 15% below pre-pandemic figures – highlighting strong domestic demand. Interestingly, the shares of Boeing (NYSE: BA) have not observed a steep fall as observed by prominent airlines including American, Delta, and United. BA stock has lost $50 billion in market capitalization since February 2020 – much more than the $22 billion of operating cash burn in the same period. Low production numbers coupled with a dip in air travel demand weighed on the company’s finances during the pandemic, but Trefis believes that long-term trends remain in favor of the stock. Our analysis on Boeing Upside Post Covid compares Boeing’s performance over the 2008 financial crisis versus the Covid-19 crisis. (related: Are Long-Term Trends In Favor Of Boeing Stock?)

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020:  S&P 500 recovers 109% from the lows seen on Mar 23, 2020, with the Fed’s multi-billion dollar stimulus package keeping the economy afloat during the prolonged lockdown and the vaccination drive allowing things to gradually return to near-normal conditions despite several waves of Covid infections.

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In contrast, here’s how BA and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Boeing Stock vs S&P 500 Performance Over 2007-08 Financial Crisis

BA stock declined from levels of around $106 in September 2007 to levels of around $31 in March 2009 (as the markets bottomed out), implying BA stock lost 70% from its pre-crisis level. It recovered post the 2008 crisis to levels of about $54 in early 2010 – rising by 72% between March 2009 and January 2010. In comparison, the S&P 500 Index first fell 51% in the wake of the recession before recovering 48% by January 2010.

The MAX crisis stalled Boeing’s topline, but rising production to assist revival

Boeing’s revenues declined by 42% from $101 billion in 2018 to $58 billion in 2020 as the FAA grounding directive for MAX aircraft led to the suspension of deliveries and a halt in production. Notably, the long-term debt soared from $10 billion in 2018 to $62 billion in 2020 due to a jump in inventories and capital raises to handle any adverse pandemic situation. Per Q3 2021 filings, the 737 MAX aircraft production rate stood at 19 units/month – slowly growing toward the target of 31 per month by 2022. The company has burned $25 billion of operating cash in the last three years, which has largely been due to $23 billion increase in inventories. Therefore, rising delivery rates will ease the balance sheet and push production figures.

CONCLUSION

Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • Since late 2020:  Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment

The high cash burn figures have largely been due to Boeing’s build-up of inventories and other working capital changes. While weak near-term demand due to the pandemic is likely to weigh on the company’s financials, Trefis believes that the 4% annual growth in global passenger traffic in the next two decades is likely to assist shareholder returns.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

 Returns Dec 2021
MTD [1]
2021
YTD [1]
2017-21
Total [2]
 BA Return -10% -8% 27%
 S&P 500 Return 1% 25% -100%
 Trefis MS Portfolio Return -1% 43% 286%

[1] Month-to-date and year-to-date as of 12/14/2021
[2] Cumulative total returns since 2017

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