Boeing: The Brand Strength Is Unrivalled

Summary:

• Boeing’s brand strength, rooted in decades of safety and reliability, is unmatched and will help it weather current financial and operational issues.
• Despite production delays and quality issues, Boeing’s competitive position and growing global air traffic ensure continued demand for its aircraft.
• Boeing is trading at a significant discount, presenting a unique investment opportunity with potential for substantial upside as operational issues are resolved.
• Risks are mainly related to timing, but Boeing’s long-term prospects remain strong, making it a compelling value investment.

Would you feel comfortable flying at a 6-mile altitude in a Chinese-made COMAC?

This is probably the most important question that we have to answer when judging the prospects of Boeing (NYSE:BA).

If your answer is yes, you probably don’t have to continue reading this article… however, we do believe that Boeing has something enduring, something that is sure to help the business bounce back, and something that is completely ignored by professional analysts today.

It is very tempting to seek a fake sense of certainty in elaborate financial models, but would you actually feel more comfortable flying on some no-name plane if they gave you a spreadsheet on how good the plane was? There is something in common between investing and air travel, I guess.

Financial markets are very competitive. Hundreds of Ivy League-educated analysts, industry experts and investment bankers are scrutinising every number reported by U.S. blue-chip stocks such as Boeing, hoping to find a good deal. How could we expect to outmanoeuvre this fine roster of spreadsheet-bearing experts?

Here is a hint for you: if you want to win don’t play chess with Bobby Fischer. We can analyse the numbers and project financials as much as we want, but our forecasts will not be better than the consensus. If we aim to outperform the passive index trackers, spreadsheets won’t help.

And that is why our opening question is so important. The Boeing Company is struggling financially at the moment. The numbers aren’t pretty, but isn’t it a great company actually?

I invite my readers to ponder about this along with me.

Could Boeing be among the strongest brands ever?

Thousands of people entrust their lives to Boeing daily. In the overwhelming majority of cases, Boeing has gotten us there safely, many times. We therefore trust Boeing, not even advertising is needed for this brand.

Perhaps strangely, Boeing reminds us of Coca-Cola. Our attachment to this brand is also rooted in deep personal experiences. I still remember the first time I tasted Coca-Cola, it was just so much better than all the other drinks I had tried before. I was hooked for life.

All of us know what Boeing is, all of us have flown their planes dozens of times, and all of these trips have gone mostly smoothly, otherwise, you would not be reading this.

Boeing stands for safety and reliability. This brand is entrenched by decades of personal experiences, with hundreds of millions of safe passages completed.

We were conditioned from childhood to feel safe in these sky-piercing ‘metal tubes’ manufactured by Boeing.

We remain attached to the products that give us great initial experiences, even if we grow weary of them eventually. I can barely taste Coke anymore, but I still drink it and I do not really know why. However, when I try some private-label cola, I do remember why I liked Coke in the first place.

Most of us are also so accustomed to the safety provided by Boeing, to the point that we do not appreciate it a great deal these days. However, our lives are worth more than a 50-cent Kirkland cola can, and most of us are unwilling to take to the skies on some no-name Chinese plane.

The brand’s strength keeps customers coming back even when some of its products disappoint. If Coca-Cola has managed to survive the “New Coke” debacle, I am pretty sure that Boeing will also weather the recent issues.

There have been crashes and, unfortunately, there will be more. But the overwhelming majority of us had a safe experience. Boeing will maintain a dominant position in the commercial aviation industry despite all the recent setbacks. We will continue trusting Boeing planes.

No matter how much COMAC spend on marketing, billions or trillions, they will not be able to re-create the goodwill that Boeing has. The strength of the Boeing brand is unrivalled.

The current issues present a unique opportunity to invest in this high-quality business. Boeing is currently trading near the lows, but it is as strong as before.

Boeing is going through a rough patch, but sales will recover

The current issues of Being were well covered by the media and there are plenty, to be honest. Production delays and quality issues have affected the 737 Max, 787 Dreamliner, and 777X aircraft programmes. At the moment labour disputes are creating added delays, while the defence division is struggling with cost overruns.

The labour strike is costing Boeing more than $1 billion per month while the defence division is also draining cash. The company is now planning to raise $10 billion worth of equity to improve its financial position.

Baron Rothschild famously said: “buy property when there’s blood in the streets“, I guess he would also be pondering the idea of investing in Boeing now.

We have over 15 years of experience in financial markets and spent most of this time pursuing fundamentally strong businesses that hit a rough patch.

We have learned that in situations with elevated uncertainty detailed financial modelling not only offers little value but can often be misleading and create a fake sense of certainty. General rules of thumb serve investors and forecasters best when dealing with elevated uncertainty.

All value stocks trade at attractive valuation multiples, but price alone is not a good reason to invest. Risk management is the most essential part of value investing and there are two factors of utmost importance when judging the risk profile of a value investment idea:

1. The business needs to have a strong competitive position and their products/services should not become obsolete.
2. The industry in which the business operates needs to be growing.

Despite the current issues, Boeing fares well on both of these counts.

1. Boeing commercial aircraft will continue being demanded worldwide due to their decades-long track record for safety and reliability.
2. Air traffic passenger volumes continue to expand globally, driven by middle-class and population growth in China, India and Southeast Asia. Global passenger volume is expected to grow by 3.8% annually over the next 20 years according to International Air Transport Association (IATA).

Despite the operational issues, Boeing still has ~7 years’ worth of order backlog. The company’s product is still highly desired, it is not becoming obsolete and demand is growing.

The airlines demand new planes to stay competitive and also due to growing passenger volumes. There are only two internationally certified suppliers Boeing and Airbus (OTCPK:EADSF) that can satisfy this demand. Neither one of them is able to fill all orders by itself.

Boeing planes will continue being demanded, and due to the market growth, the company’s sales volumes are likely to stay resilient even if it loses some market share.

When operational issues are fully worked out, the revenues and the profits will recover and continue growing with the industry.

Boeing is trading at an all-time discount to order backlog

The strike will end eventually, and quality issues will be resolved. It is likely that, the cost of manufacturing Boeing planes will increase tough.

Neither of the two dominant suppliers has exorbitant pricing power. After all, Boeing would not want to alienate their loyal customers. Having said it, Boeing can pass on some cost increases to its customers.

Many aircraft purchase agreements include escalation clauses, which allow for price adjustments based on changes in key cost factors, such as inflation, labour costs, or material prices. Escalation clauses provide some protection for Boeing against cost increases, but they are often capped at certain percentages and may not cover extreme or unexpected cost surges.

Before the pandemic and 737 Max crashes, Boeing was delivering close to 800 planes per annum and generating close to $10 billion of operating earnings on $100 billion in revenues.

Boeing, $ million	FY2018	FY2019	FY2020	FY2021	FY2022	FY2023	H1 FY2024
Market Cap	183,143	183,334	120,843	118,315	113,528	157,693	93,873
Net Debt	1,966	15,275	34,111	42,598	43,026	38,912	45,321
EV	185,109	198,609	154,954	160,913	156,554	196,605	139,194
Backlog	490,481	463,403	363,404	377,499	404,381	520,195	515,874
Backlog/EV	2.65	2.33	2.35	2.35	2.58	2.65	3.71
Airplane deliveries (no.)	806	380	157	340	480	528	175

Click to enlarge

Boeing annual reports, TIKR Terminal

The operating profit margin of Boeing likely will come under pressure within the next few years, as the company will have to absorb some cost increases itself. Boeing is likely to generate profit margins below those seen before the COVID-19 pandemic. The management is guiding for a high single-digit margin, and we believe this is a reasonable assumption.

When aeroplane deliveries return to the 800+ per annum mark, Boeing is very likely to generate $7- $8 billion of operating profits. At a 20X earnings multiple, Boeing would then be worth upwards of $230 per share. It currently trades at ~$150, offering a 50% upside.

Nobody knows exactly how long it will take for Boeing to come back to a smooth operation, or when the bottom in the stock price will be wrecked. Stock market timing is close to impossible, and we will not claim otherwise. However, it is quite clear that this great business, and it is undervalued.

The risks

There are risks, but they mainly relate to timing. Increased FAA scrutiny might hold back production for longer than expected, delaying the payback to our investment. Defence and Space division could face further struggles if the Department of Defense is not willing to renegotiate the fixed-price development contracts. Neither of these issues will sink the company, however.

Boeing will soar again.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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