Market reaction Thursday to Boeing’s new schedule for 787 first flight by year end, and EIS in 4Q10, was good: stock closed up more than 8% or $4 to $51.82. The Dow Jones Industrials were up a mere 0.39%.
Aerospace analyst reaction was a bit more muted.
Buckingham Research’s Richard Safran initiated coverage of Boeing Aug. 12 with an Accumulate. After yesterday’s announcement and stock gain of 8% neared his price target, today Safran downgraded his rating to Neutral. He writes:
Three reasons we’re downgrading BA to “Neutral” from “Accumulate”: 1) Yesterday’s announcement removes most of the near term catalysts we identified. As such, we think that near-term, BA shares will trade in a narrow range around our $55 price target; 2) Aerospace stocks move on aircraft orders and we don’t see orders picking up until at least late 2010; 3) We see limited (6.1%) upside to our $55 target at this point (our valuation methodology uses a target relative multiple of 75% of the S&P applied to our 2010E of $4.74).
Fitch viewed the new schedule, accompanied by a $2.5bn charge, as an incremental negative. Fitch comments:
The Boeing Company’s new 787 schedule to be an incremental negative to BA’s credit ratings. Cash flow pressures will persist through 2010 due to inventory build-up, delayed advance payments, and higher development expenditures. Fitch believes that break-even or negative free cash flow (cash from operations less capital expenditures and dividends) is a possibility in 2010 depending on the ultimate schedule for 787 deliveries and other factors such as pension contributions. BA has doubled parent company debt levels in the past six months, allowing BA to maintain a healthy liquidity position, but pressuring credit metrics. Fitch considers BA’s credit metrics to be weak for the ‘A+’ rating, and the 787 developments have eroded the margin of safety at the current rating level.
Goldman Sach’s Noah Popanak has a Neutral rating on Boeing, unchanged from prior to Thursday’s announcement. He writes:
We view today’s 787 update as a mixed bag. On a positive note, a 4Q10 first delivery is in-line with expectations, there was no reach forward loss recorded, future profitability looks to be stronger, and cushion was added to the previously aggressive flight test program. On the negative side, a nine month delay is certainly not negligible, a large charge will be recorded in 3Q, the side-of-body fix still has to go back through the test that discovered the initial problem, and other areas of risk remain.
We remain bullish on Commercial Aerospace. Separately, IATA reported encouraging traffic numbers with meaningful second derivative improvement. However, we continue to prefer select suppliers over BA given its large poorly positioned Defense business, remaining 787 risk, lack of free cash flow generation, large underfunded pension, and increasing competition from emerging markets (which act as new platforms to add content for suppliers).
Morgan Stanlye’s Heidi Wood has an Equal Rate rating and a $50 price target. She writes:
Investment conclusion: BA’s relief rally yesterday reflected confidence the worst may finally be behind on the 787, with pending 4Q first flight and no forward loss. While these are positive events, there are too many substantial challenges ahead to assert comfortably there are no further negative surprises. We’re remaining on the sidelines, as the market has priced in most of the good news and not allowed for tougher realities in 2010. Beyond first flight and certification, the most complex challenge of coordinating 787 production is still ahead. Moreover, 2010 cash flow is challenged with inventory, capex & financing rising, supplier and airline payments. At $52, BA shares are trading at 11.5X 2010 P/E, an 83% relative P/E which reflects expectation for a cyclic upturn. If all goes well with the 787 schedule, this is appropriate valuation but then the shares in the mid $50’s are more or less fully valued. On a sum of the parts basis, defense P/E’s of 8-10X puts the implied commercial aero business at 13-15X, the upper end of mid cycle valuation. We are nudging our PT to $50 to reflect a risk-adjusted cyclic view.
UBS Securities: David Strauss sees mixed news in the developments. He’s still skeptical about the projected production rate of 10/mo in 2013. He maintains a price target of just $30 with a Sell rating. He writes:
BA will see a future EPS benefit from recognizing more 787 costs now with the $2.5B charge writing off more than half of its WIP inventory. Assuming an 800 airplane block, the profitability on each 787 is improved by a little more than $3M. While BA has altered the recognition of its costs so the present is worse and the future better (same as forward loss), today’s news has no impact on what we continue to see as a very poor cash outlook (see our note from Aug 10). It’s worth noting that Boeing still sees an $800M quarterly cash drain related to 787.
Wells Fargo has a Market Perform on the stock. David Strauss writes:
Positive Stock Reaction, But What is Next? If we assume BA’s defense business is worth a similar 10x EPS as the large-cap defense group, the current stock price implies about an 11x EPS multiple for Boeing Commercial Airplanes (BCA), modestly below other commercial aerospace suppliers. However, we believe other suppliers have lower operational risks and better aftermarket leverage to an improving commercial cycle. Therefore, we think 11x earnings for BCA does not adequately reflect the risks that remain on the 787 program.