Introduction

             The Coronavirus pandemic in 2020 marked a recession for the world’s economy, one we haven’t experienced since 2008. In 2022, with greater knowledge about the virus, the successful development and world-wide administration of vaccines, economies have recovered and are growing at a fast pace. However, the recovery has not been an even path. The travel industry remains at significantly lower levels compared to pre-pandemic due to travel restrictions that come from governments and people’s lack of understanding and trust in the effectiveness of vaccines.

             It is our view that in 2022, sentiment will accelerate from hesitancy to mass adoption. We believe the travel industry will completely recovers and subsequently enter a fast-growth period. Through multiple waves of Covid variants, such as Delta and most recently Omicron, governments have become increasingly comfortable in handling the situation. The comfort comes from data about the effectiveness of vaccines in preventing severe health effects. For example, United States remained fully open for travel through Delta and Omicron. Vietnam, a country which used to enforce a zero-Covid policy, has shifted their tone to “live with the virus,” evident through their reopening of international travel beginning this month.

             Given we are about to enter a fast-growth period for the travel industry, companies that operate in this sector stand out as great investment opportunities. They are even more attractive given these stocks remain well below pre-pandemic levels. One company that will be a direct beneficiary from the reopening, yet relatively immune to destination-specific disruptions, is Boeing. This is the largest aircraft manufacturer in America, one of two rich-traditioned companies in the entire world. Boeing manufactures short, medium and long-haul aircrafts that are reliably used by airlines throughout the world on various routes.

Investment Thesis

An investment in Boeing is predicated on two following theses:

1. Increased ordering of new airplanes.

Boeing is benefitting from a secular and a pandemic-induced tailwind. First, even without the pandemic, the airplane industry is at a transition period in which airplanes are too old and need to be replaced, either to improve passenger satisfaction or to improve fuel efficiency given high fuel prices. Take Delta Airlines for example, whose Boeing fleet consists mainly of Boeing 757 which are close to 30-40 years old, and B767 which are about 20-30 years old. These airplanes will need to be replaced given the average lifespan of a commercial aircraft being around 20 years.

Second, the pandemic has effectively accelerated airlines’ fleet turnover. Old aircrafts that have been sitting on the ground for too long now become unserviceable. Factoring in the fuel inefficiency of those old aircrafts, airlines are deciding to order new, more fuel efficient and customer-satisfied aircrafts.

             2. Return to service of the 737 Max.

Currently, the most produced and delivered aircraft by Boeing is the medium-haul 737 Max (we do not have information about profitability of each aircraft type, however let’s assume because the 737 Max is the most profitable, Boeing is focusing on this line). This aircraft had a very tumultuous start of its tenure, as shortly after the launch in 2019, there were multiple fatal crashes that resulted in its grounding by aviation administrations around the world. Not until the end of 2020 did America’s Federal Aviation Administration approved the airplane for flying again, and the decision was followed by other countries.

However, China far surpasses United States as Boeing’s biggest customer for the 737 Max, yet, the Civil Aviation Administration of China has not officially approved this aircraft until very recently. It was only in December 2021 that the CAAC issued a list of directives that airlines need to do in order to operate the 737 Max again, and it was only last week that this aircraft was flown for the first time since 2019 on Chinese airspace. Operating the flight was Hainan Airlines, yet this was only a special chartered flight, not a commercial flight.

We believe it is only a matter of time until the 737 Max is widely flown again in China, Chinese airlines will complete their orders to clear the inventory for Boeing. This will bring huge cash flows for the company, making 2022 the truly inflection point for Boeing’s business.

Valuation

             Despite recent positive developments in the afore-mentioned catalysts, we believe the price of Boeing stock is still significantly lagging the potential earnings power for the Boeing company. Looking to pre-pandemic, Boeing’s stock remains well off from those prices, about 50% off from all-time high of $440/share in 2019. Arguably, the growth path for Boeing’s business in 2022 should be even greater than in 2019, given the afore-mentioned investment theses. We view this dislocation serves as a great investment opportunity, as we would be buying at a depressed level. More importantly, looking in just the last year, we are very appalled why Boeing’s stock today is much lower than where it was just a year ago (about $270/share in March 2021). Let us remind you that March 2021 was before successful world-wide roll-out of vaccines, lifting of restrictions, mass re-opening of travel destinations and before any news of Boeing 737 Max recertification in China.

             Bottom line, while merits may not be strong enough for Boeing’s share price to come back to pre-pandemic levels, we believe the stock price of Boeing today should be higher than where it was last year, above $270/share. This means investors buying today at a price level of $225/share has a comfortable 20% to the upside.

             Let’s look at what analysts on Wall Street think about Boeing’s stock. In the last 3 months, 16 analysts have announced their 12-month price targets for Boeing (BA). The average price target among them is $269.07/share, representing a 19.08% upside to be had. The highest price target is $306, representing 35.42% possible upside. The lowest price target is $220, representing a merely 2.64% downside from current stock price of $225.96 as of the close on 14 Jan 2022.

Valuation - Discounted Free Cash Flow Model

             At Morgan Stanley Research, the price target for Boeing is $274/share. This was derived by estimating 2025 Free Cash Flow per share, discounting it 3 years to 2022, which results in $12.19 per share. Then, analysts apply a 22.5x valuation multiple on this free cash flow, making the price target $274/share for the next 12 months. The 22.5x multiple represents an early commercial aerospace up-cycle, factors in a successful return to service for the 737 Max, and rebounding of air traffic.

Technical Analysis

             On the technical side, shares of Boeing have recently broken out of a year-long consolidation, marked by the green trendline which acted as resistance to the stock multiple times in 2021. Shares found strong support many times in the $180-$200 price area (shaded red). This technical formation is referred to as a descending triangle, one that is formed when sellers are willing to sell at lower prices (resulting in the descending line), yet there are buyers at a particular price level to support the stock (horizontal line). The fact that shares have broken out to the upside the descending trendline indicates that selling pressure has subsided and buyers are in control.

This is a classic technical formation that has worked multiple times. In 2020, shares of Boeing formed a very similar technical pattern and when shares broke out, there was a strong move to the upside.