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The Boeing Company (NYSE:BA)’s shares went into a massive new up-leg after the company presented earnings for its third fiscal quarter at the end of October and the current rally has enough steam to last well into 2024, in my opinion. The aircraft manufacturer’s order books are full and the U.S. economy is performing well, suggesting that Boeing is entering the 2024 financial year on an upswing. Passenger air travel is set for a new record next year as well, which could attract new aircraft manufacturing orders and help Boeing achieve positive core operating margins. Although shares have become much more expensive since I last worked on the aircraft manufacturer, I believe the risk profile is still favorable!
Previous rating
I previously rated shares of Boeing as a buy when they were in a buy-the-drop kind of situation in September. Since then, a major revaluation has taken place, which was driven by a decent earnings report for the third-quarter and a confirmed outlook for FY 2023 free cash flow. However, I believe that Boeing still has upside potential as it moves closer to positive core operating income in FY 2024. The commercial aircraft division especially is set to benefit from a favorable economic climate and if the U.S. economy avoids a recession, Boeing’s shares may continue to revalue higher.
2 catalysts for FY 2024: A record year for air travel and positive operating income margins
According to the International Air Transport Association, the industry group expects passenger travel to hit new records in 2024… which are projected to surpass the 2019 high in air passenger travel. For 2024, the International Air Transport Association expects 4.7B travelers using airline services which would reflect a 9% growth rate compared to 2023 and a 4% growth rate relative to 2019… which marked the previous record for global passenger volumes, just before the COVID-19 pandemic decimated the airline industry. The industry group further projects about 8% revenue growth for the airline industry and a combined $25.7B in airline profits (Source).
IATA
The U.S. economy also remains in good condition and grew at a 4.9% rate in the third-quarter, providing additional tailwinds. Strong economic growth and record passenger travel volumes indicate that airlines may be willing to place new aircraft orders with manufacturers like Boeing. A favorable macro picture is why I believe the aircraft manufacturer is set to add to its order backlog and slowly, but gradually move towards positive core operating margins in FY 2024… which in the third-quarter were still negative. Boeing’s aircraft order backlog was valued at $392B and with air travel set for a record year, the U.S. aircraft manufacturer may attract new big-ticket orders for airlines around the world.
The commercial aircraft division especially has seen renewed momentum after the pandemic with many airlines placing new orders with Boeing. However, Boeing’s commercial aircraft division is not yet profitable, in part due to high costs. The company achieved a negative 8.6% operating margin on $7.9B in revenues in the third-quarter, but the situation is improving and Boeing may see positive operating income next year.
Besides the continual expected strength in airline travel, I see a potential return to positive core operating margins as a potential catalyst for Boeing’s shares. Boeing reported a 6.0% negative core operating margin in Q3’23, but the firm has seen a material improvement in its margin picture due to a stronger order situation (Boeing added 398 planes to its order backlog in Q3), an escalating pace of deliveries following the end of the pandemic and lower operating costs. A return to positive (core) operating margins would be a major positive catalyst for Boeing and likely also precipitate a new round of EPS upward revisions.
Boeing
Boeing’s valuation, EPS revision potential
Boeing is not cheap, at least not anymore. However, that does not mean investors should ignore the aircraft manufacturer.
Boeing is projected to see $(6.17) per-share in earnings this year, but also expected to post positive earnings in 2024 as the company finally digs itself out of the pandemic hole. I also believe that Boeing has considerable EPS surprise potential, especially if the U.S. economy keeps performing as well and if the airline industry approaches new passenger travel records in 2024.
Boeing is currently valued at a 58X P/E ratio (based off of FY 2024 earnings), but this P/E ratio drops to 30X based off of FY 2025 earnings. With EPS estimates set to reset higher, investors may see the P/E ratio drop further next year. Given the fundamentally positive macro tailwinds, I believe Boeing could trade at ~35-36X FY 2025 earnings, assuming that its achieves positive operating margins, implying a fair value range of $284-294.
Risks with Boeing
Boeing is dependent on the growth trendline in the U.S. economy and a favorable economic outlook since airline companies are more willing to place aircraft orders with manufacturers when they expect the economy, and their industry, to do well. Therefore, I see the macro picture — the performance of the U.S. economy — as the biggest risk factor for Boeing. What would change my mind about Boeing is if the company failed to achieve positive core operating margins next year.
Final thoughts
Boeing has seen some major gains since it presented its third-quarter earnings card in which the aircraft manufacturer confirmed its outlook for FY 2023. However, I believe the macro picture still supports an investment in Boeing as the company could add to its backlog of aircraft orders next year as the travel industry is projected to surpass the 2019 passenger travel volume record (the first catalyst). Boeing also has the opportunity to move closer to posting positive core operating margins (the second catalyst), especially if the commercial aircraft division keeps attracting new contracts from airlines. While shares of Boeing trade at a relatively high 55X P/E ratio, the P/E ratio is expected to drop drastically next year and the company also has considerable EPS revision potential. Given the favorable macroeconomic profile, I still see shares of Boeing as a buy heading into 2024!
