Boeing’s Gigantic Order From United Air Makes It Investment-Worthy

New Order! Double cheeseburger, fries and a cola? Even better. I think. The news broke early on Tuesday morning. United Airlines (UAL) , once and again a profitable business after the past two quarters, had placed an order with Boeing (BA) for new commercial aircraft.

In full disclosure, I did purchase some BA stock in this morning’s pre-opening hours before I knew that I would be writing this piece, so I am long BA small.

The deal is this. United has placed a new order for 100 787 Dreamliner aircraft with an option to buy an additional 100. These aircraft will be delivered between 2024 and 2032 and will replace aging 767’s and 777’s. United’s entire wide-body fleet is composed of aircraft manufactured by Boeing.

More international flights have been added to United’s daily schedule since travel has continued to rebound post-pandemic and fleet modernization has become necessary. CEO Scott Kirby explains that replacing Boeing wide-bodies with Boeing wide-bodies rather than switching to the Airbus (EADSY) A350 makes sense in terms of storage given the smaller size.

The order also includes 56 additional 737-Max aircraft with an option for 44 more. This is in addition to existing orders for 300 new single aisle (narrow-body) aircraft placed last year with both Boeing and Airbus. All together, at list prices (doubtful) this deal is worth tens of billions of dollars to Boeing.

This…

Readers may have noticed that JP Morgan five-star (at TipRanks) analyst Seth Seifman reiterated his “overweight” rating on Boeing on Monday and increased his target price from $170 to $200. This was ahead of Tuesday morning’s news and in response to reports that a potentially very large (as many as 500 aircraft) order would be placed in aggregate with both Boeing and Airbus by Air India.

On Boeing

Boeing is set to report the firm’s fourth quarter late in January. The firm is coming off of a tough third quarter. In fact, Boeing is coming off of a few tough years, posting losses for 12 of the past 15 quarters. A large portion of that is due to the well documented issues with some of the firm’s aircraft, most notably the 737-Max that was involved in more than one fatal accident. The rest was due to the pandemic.

All that said, you still have one large American based industrial firm here that employs more than 140K people, is one of two global firms making commercial aircraft in large numbers and remains a significant defense/government contractor. The other large defense contractors have all hit the ball out of the park this year. The other defense contractors are not heavily involved in the manufacture of civilian durables.

For the current quarter, Wall Street is looking for adjusted EPS (GAAP EPS will be higher) of 0.24, but estimates are all over the map. The range of expectations across 15 sell-side analysts is for this number to land anywhere from a loss of $1.36 to $1.30. In other words, these analysts have no idea. Revenue is seen printing at $19.5B, within a range spanning from $16.9B to $23B. Can’t make this stuff up.

For the third quarter, Boeing posted positive free cash flow for the second time in four quarters. That said, free cash flow for the trailing 12 months as of September was negative, as the firm heads potentially for a fourth consecutive year of negative free cash flow. Positive free cash flow is a major goal for this firm for 2022, and was stated as such several times in that September press conference.

Balance Sheet

The balance sheet has been remarkably stable for a firm that has gone through what Boeing has gone through. I did not say anything overtly positive. I said “stable.” As of September, the cash balance stood at $14.257B, up from the two quarters prior. Inventories were close to unchanged from literally every quarter ever for Boeing at $79.777B. The current ratio of 1.22 is fine. The quick ratio (sans inventories) of 0.21 is not something I would “high five” over, but is quite normal for this firm.

Total assets come to $137.558B including $10.416B in “goodwill” and other intangibles. I have no problem with that. Total liabilities less equity adds up to $155.193B including $50.59B in long-term debt, of which almost $5B is labeled as current. While pension related liabilities are still running at more than $11B, that’s down from more than $20B in 2020.

Is this a good balance sheet? It’s not going to win any gold stars or be called “fortress-like” anytime soon. That said, it is functional for now. The debt-load needs to be reduced relative to cash on hand. Hard to criticize the level of inventories especially if orders are about to pop.

Thoughts

Personally, I think the name could be investment-worthy if one thinks that the United order is not a one off and several airlines are going to need to modernize. The name is a decent enough trader either way.

I do not love the recent free cash flow history nor am I fond of that balance sheet. That said, large orders have a way of correcting these things.

Tell me, what do you see?

Double Bottom Reversal with a $173 pivot?

Double Bottom with a $142 pivot, followed by a Cup with Handle bearing a $179 pivot?

What you see matters. It matters how you plan. The daily MACD has turned for the better. Relative strength is strong without being perversely overbought. Note the “golden cross” (50 day SMA crosses over the 200 day SMA).

If you see the first chart as I do, well, I am long the shares, though not many. My target price is $199. I’ll buy the shares down to the 21 day EMA as part of an attempt to build out my long. I’ll panic if I see my $173 pivot fail.

If you see the second chart, the first pattern did what it was supposed to. The $142 pivot provided a breakout that ran to $173. The cup with handle with the $179 pivot would produce a target price of $206. The add and panic levels would remain the same.

Of course that’s how I see it. How do you see it?