Boeing's stock price movement over the past four months gives an insight that the stock may be aiming, if not for the sky, then certainly for its all-time high. What follows is a discussion of the reasons for the sudden surge in Boeing's share price and whether it is justified and, more importantly, sustainable in the long term.
Summary:
- Boeing's stock price has increased by more than 75% in the last four months in spite of two worse-than-expected earnings reports.
- The company was hit hard by the Covid-19 pandemic. Since then, it has taken on a significant amount of long-term debt while its earnings have turned negative. The war in Ukraine is putting additional pressure on the company's recovery.
- The company plans to increase the production of its most popular airplanes and boost its space programmes. It is undoubtedly a winner amid US plans to strengthen the country's defence system.
- Boeing is also known for frequent lobbying activities and government grant receives, which may indicate the potential for the company's stock to outperform its peers.
- The forward EV/EBITDA and P/E ratios suggest that the company may be overvalued in comparison to its sector peers.
Boeing's stock
Boeing's stock price has had a stellar four months, recovering 75% of its value from its previous low of 120 USD per share. Boeing's share price began to fall from its all-time high of 446 USD in March 2019, and continued to plunge to 89 USD a year later amid Covid-19 uncertainties.
Source: TradingView
Financials
According to analysts' consensus, Boeing reported a loss of 1.75 USD per share for Q4 2022, a miss by 1.96 USD but a considerable improvement from the previously reported loss of 6.18 USD per share. Boeing has reported better-than-expected earnings in only two out of the last ten periods. One of these better-than-expected earnings – results of Q2 2021 – is the only profitable quarter showing a small 0.40 USD profit per share. Despite the worse-than-expected last two quarterly earnings, Boeing stock is in a strong uptrend.
Source: Seeking Alpha
While the most considerable loss in Q4 2022 came from the commercial airplanes segment, the worst-performing segment for the full year was the defence, space & security business.
Source: Boeing 4Q 2022 financial report
Looking at the company's financials, it is clear that the Covid-19 pandemic made a significant dent in Boeing's statements, from which it has yet to fully recover, although an improvement can be seen since FY2020.
Source: SeekingAlpha
War in Ukraine further pressured Boeing's financial situation as numerous countries entirely stopped flights to and from Ukraine and Russia. The company recorded 212 million USD in impairment charges in Q3 2022 related to the closures of facilities in Ukraine and Russia. Furthermore, Boeing suspended its business in Russia, including purchases from Russian suppliers, meaning potential supply chain disruptions in the future.
Boeing's biggest rival is Europe's Airbus. Both companies have suffered from the pandemic and the war in Ukraine, although Airbus appears to be in a better financial position than Boeing. While we cannot calculate proper EV/EBITDA and P/E ratios for Boeing, as both EBITDA and earnings have been negative for the last few reporting periods, we could conclude that Boeing is overvalued on both of these ratios based on projections for the next fiscal year (FWD). Meanwhile, Airbus reports both current and forward ratios in line with the sector median.
Debt to Free Cash Flow shows us that Boeing is more leveraged than Airbus. While both companies have similar free cash flows (Boeing 5.08 billion USD versus Airbus 5.52 billion USD), Boeing's ratio is larger due to considerable liabilities, including long-term debt, since the pandemic's start. In fact, long-term debt to total assets has increased to 111.5% for Boeing, meaning that all assets combined could not cover all its current and long-term liabilities.
Source: SeekingAlpha
Production
Commercial airplanes segment's fourth quarter and, therefore also, full-year revenue increased mainly due to 737 and 787 deliveries. The 737 airplane production rate, currently at 31 per month, is planned to be increased to 50 per month in FY2025 and 2026. 787 airplane production rate is planned at 5 per month at the end of 2023 and 10 per month in FY2025 and 2026.
Boeing also expects to benefit from China's reopening and determination to return its economy back on track of growth. China Southern Airlines already returned the 737 Max airplanes to commercial service in January 2023.
Boeing operates with sustainability in mind, with many factories powered by 100% renewable electricity and each new generation of Boeing airplanes is reported to be produced with 20-25% reduced emissions.
Boeing Defense, Space & Security
Boeing Defense, Space & Security (BDS) is one of Boeing's three business segments (currently 35% of 2022 revenue) and one of the world's largest defence and space contractors. In 2021, BDS delivered 75% of its business to US customers and 25% to non-US customers.
With the US government strongly committed to strengthening the country's defence system, the outlook for Boeing and other defence companies remains optimistic. The US fiscal budget for 2023 includes 773 billion USD (an increase of 4.1% versus 2022) spending on national defence programs. Boeing Market Outlook forecasts a 2.6 trillion USD market opportunity within the defence and space sectors during the next decade. BDS won contract awards worth 5 billion USD, leading this segment's backlog to 55 billion USD.
The company is also working on existing programs to ensure its strong performance within the space sector, including Space Launch Systems and Commercial Crew.
Corporate Lobbying and Government Contracts
Boeing, one of the main beneficiaries of increased US defence spending, is a frequent recipient of government contracts. Over the past 10 years, Boeing has received 1.12 billion USD in contracts from the Department of Defense, in addition to other, much smaller grants from agencies such as the Department of Transportation, the National Aeronautics and Space Administration, and the General Service Administration.
During the last three years, Boeing has been awarded around 100 million USD on a yearly basis, with 27, 35, and 34 transactions in 2020, 2021, and 2022 respectively. Interestingly, there have already been 20 transactions in the first month of 2023, although the grants have been smaller in value terms.
Source: USAspending.gov
Boeing is also no stranger to corporate lobbying. In 2023, Boeing spent 4.76 million USD on lobbying in a variety of areas, including defence, aerospace, pension environment, education, financial institutions, securities taxation, Internal Revenue Code labour issues, and many others. Numerous studies in the past have concluded that lobbying could have a positive impact on a company's financial performance and, consequently, its stock price.
Conclusion
It seems that Boeing could be viewed from two perspectives. One is its future prospects in defence, space and security, the possibility of commercial airline activity returning to pre-pandemic and pre-war levels, its ESG positive initiatives and its close ties with the US government. On the other hand, the company's financials paint a bleak picture, with negative (though improving) EBITDA and debt higher than total assets. The question is whether the first perspective can justify the phenomenal rise in Boeing's stock price in recent months. If not, the company's finances still have to improve abundantly to substantiate its current stock price and make it a potentially favourable investment.
Santa Zvaigzne-Sproge, CFA, Head of Investment Advice Department at Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement, or investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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