Boeing (BA, Financial) has had a great start to the year. It's had its ups and downs for the past few years, but things look to finally be making a solid turnaround. New hires as well as good sales and production numbers are positive signs, especially when many other companies are struggling in this economic environment.
Investors have also been optimistic on the stock recently. Although the stock has been on a hot streak lately, up more than 28% in the last six months, it is still below its pre-pandemic levels. Investors might still be wary about the past problems associated with the company and a possible recession.
Personally, I believe Boeing still has room left to run. Management is forecasting healthy returns in 2023, the macroeconomic situation is improving and Boeing has its priorities straight (finally). Brian West, the CEO of the company, says the focus is clear: generate cash and deliver airplanes while paying down debt.
Some background for those who live under a rock: Boeing's 737 Max planes were previously grounded for 18 months after two fatal crashes. Right after that, Covid-19 erupted worldwide, upending the global economy. During that time, the company had to take on a lot of debt, leading to a deterioration in the balance sheet.
In the aftermath of the pandemic, Boeing has been slow to recover. However, as time progresses, demand for air travel has increased, taking the company with it. The 737 Max is now in full operation again worldwide, and demand for the aircraft remains strong. More importantly, the company has made progress in fixing the toxic culture that put profits before safety and engineering excellence.
Gaining pace once again
Some investors might be confused Boeing stock is doing well considering the aerospace giant delivered a disappointing fourth-quarter earnings report. Boeing reported a loss of $1.75 per share, while analysts had expected earnings of $0.26 per share. The aerospace giant blamed the loss on supply chain disruptions, which drove up total costs. Boeing 787 planes were also delayed, which added additional costs to their customers. In addition, production delays meant that Boeing had to compensate customers.
Boeing reported revenues of $19.98 billion for the fourth quarter of 2022. This was up 35% from the same quarter of 2021. However, analysts were looking for $20.38 billion in revenue instead.
Although the 787 Dreamliners and Max have suffered quality issues, Boeing is optimistic that they won't cause a huge revenue decrease. The company predicts that it will have an unstable period in the interim but will eventually recover once customers restock their planes.
However, these numbers still show a recovery. To put things in perspective, the company lost $7.69 a share in the fourth quarter of 2021. When you compare the two numbers, Boeing is heading in the right direction.
The biggest positive for Boeing is that it reported positive free cash flow for the first time since 2018. Boeing produced $3.1 billion in free cash flow in the final quarter of 2022, surpassing its own estimates of $2.5 billion. It also simultaneously came within $1 billion of its forecasted earnings per share, which was a notable achievement.
According to a recent report by Boeing, it received 774 commercial orders for the next generation of planes. These included 561 orders for its 737 line. It delivered 480 airplanes in the full fiscal year.
Considering the reversal of fortunes, I believe Boeing has successfully reinvented itself and restored buyer confidence in its jets. Although earnings disappointed Wall Street, the outlook for Boeing is enticing.
Tailwinds are pushing Boeing upward
Aside from Boeing itself, several external factors serve as tailwinds, such as the macroeconomic environment. The Fed is speculated to soon ease up on monetary policy. It recently instituted only a quarter percentage point interest rate hike from 4.5% to 4.75%. Although it was the eighth consecutive interest rate hike, it was still smaller than the previous rate increases.
The cooling of interest rate increases should greatly impact Boeing's business. The company had to take on huge amounts of debt, and most of it is variable rate external debt, so interest rates are key.
In addition, China Southern Airlines recently reinstituted the 737 Max to its flight paths. China is a top aviation market. The Aerospace Forum estimates the value of the Chinese aviation market to be worth around $575 billion in 20 years, growing about $28.75 billion a year. Despite political tensions, trade between the U.S. and China rose to a record high in 2022. Hence, Boeing will benefit immensely from finally being re-approved for Max operations in China.
Takeaway
After a few rough years, Boeing is making a comeback. However, shares still trade at a discount to their 52-week high. Considering its recent performance and prospects, I believe Boeing is undervalued. The recent history of this company has understandably caused long-lasting negative sentiment, but this provides an opportunity for those bullish on the stock.
