When the market opens, we will start a position in Boeing (BA) with an average cost basis of around $205/share, making purchases 1% of our portfolio. We intend to grow this position to 3% ultimately.

If you have followed us long enough, you would notice that we used to own Boeing in the $240s earlier in the year, and decided to exited with a loss in the $220s. Since then the stock came down to as low as $180s, proving our exit decision to be correct. As of today the stock is in the $200, still 10% lower than where we exited. As discussed in yesterday's note, we're facing a decision to add this name back to our portfolio. 

Here was what we wrote for our investment thesis in Boeing earlier this year, in the $240s: 

"Our thesis is predicated on a few beliefs. First, we see a near-term catalyst related to a final conclusion of the 737 Max saga, as we expect China will finally recertify this aircraft before the end of 2021. Additionally, we believe 2022 will be the inflection year to Boeing's free cash flow, and Boeing's history points to the inflection point being a good entry point to get into the stock. Looking further out, we've seen estimates that suggest Boeing's free cash flow will be greater than $20 per share in a normalized year 2023. When visibility behind Boeing estimates begins to improve (driven by 737 ungrounding and vaccine/therapeutic driven improvements to air travel/global tourism), we think positive momentum will finally build into the stock." 

Now that the stock is down more than 20% from when we wrote this investment thesis, let's examine how it has changed.

First, China is really close to re-certifying the Boeing 737 Max. Yesterday, the Civil Aviation Administration of China gave Boeing a list of directives needed to be done in order for the aircraft to get final re-certification. What's left for Boeing now is to check off items in the list, before they can deliver those 737Max,  expectedly in the first quarter of 2022. This will help Boeing to start clearing ~370 of the 737Max from inventory, with 1/3 of those destined for China.

Second, in the most recent quarterly earnings, management reiterated on the conference call its expectation that the business will turn cash flow positive in 2022. Investors have been waiting for the inflection point for such a long time, and Boeing is getting there. Turning to the balance sheet, Boeing ended the third  quarter with $9.8 billion in cash and $10.2 billion in marketable securities for a total balance of $20.0 billion. That’s down from $21.3 billion in the second quarter, primarily driven by debt repayment and operating cash outflows. Boeing ended the third quarter with $62.4 billion of debt, down from $63.6 billion at the start of the quarter. Deliveries of the 737 Max will help generate the cash flow for Boeing.

Looking forward on valuation, we're following Morgan Stanley's price target of $274 for Boeing. This is based on 2025 estimated FCF per share, discounting 3 years to 2022, which results in $12.19, and then placing a ~22.5 multiple on it.

Upside catalysts include:

• 737Max re-entry into service converts inventory into cash quicker and more efficient than expected.

• Acceleration of aircraft retirements/ upgrading airplanes either to increase service competitiveness or fuel efficiency, will boost aircraft demand for Boeing. This is already the case for the 737Max, the latest version of the narrow-body, short-range 737 aircraft - airlines benefit by upgrading to this version, rather than the older 737 versions.

• 777X, another newer version of the wide-body, long-range aircraft.

Downside risks:

• Any additional 737Max delays.

• Recession/ decrease in travel demands decreasing the profitability of airlines, leading to reduced aircraft demands.

• Distressed financial conditions for airlines leading to order cancellations.

• Boeing's high amount of debt can force management to offer more shares to raise cash.

Bottom line, we were willing to own Boeing in the $240 before, and now that shares are in the low $200 with improved fundamentals, we're very much willing to buy this stock again.