Morgan Stanley Research / Boeing Co.: Three Reasons to Buy Boeing

22 Jul 2021 | Kristine T Liwag | Matthew Sharpe
Boeing Co.: Three Reasons to Buy Boeing
Boeing’s stock is particularly attractive after the pullback. Narrowbody demand is strong, investor sentiment is negative, and the stock is oversold this week on the back of no changes in fundamentals.

Particularly Attractive Entry Point

Boeing’s stock looks particularly attractive after the pullback. The stock is down 13% from June peak of $255. Headline news has been negative, but in our view this is largely white noise and does not change fundamental outlook for the company. Investor sentiment is negative and earnings next week on Wednesday, July 28th could be a positive catalyst. Additionally, narrowbody demand is strong and our conversations with industry players is that airlines that cancelled narrowbody orders during the worst of COVID-19 want their slot back. We maintain our PT of $274.

White Noise, No Change to Fundamentals

It was reported by Reuters that the FAA issued an Airworthiness Directive (AD) to inspect 9,315 Boeing 737 aircraft globally regarding cabin altitude pressure switches. The AD estimates 2,502 airplanes are of US registry. The FAA estimates costs for functional tests of the parts to be $85 per test. Also, on-condition functional test and switch replacement is 1 work-hour (at $85 per hour), $1,278 for parts, and $85 for reporting. We note that this AD does not ground the fleet and does not change the outlook for the Boeing 737 MAX aircraft. FAA directed inspections of aircraft are normal course of business even before the Boeing 737 MAX grounding. In the last 60 days, the FAA has issued 98 airworthiness directives covering Boeing and Airbus aircraft as well as helicopters and engines. We note that the Boeing 737 MAX grounding have increased headline focus on these announcements. We view this headline news as white noise that does not change our investment thesis for Boeing.

Narrowbody Demand is Strong

During our Virtual Paris Air Show, we learned demand for narrowbody aircraft remains strong. Aircraft lessors noted airlines that cancelled narrowbody orders during the pandemic now want them back. Boeing is reportedly moving through its 737 MAX inventory as demand grows. We also learned of increasing interest in the 737 MAX from Chinese airlines. Recertification of the MAX in China, which could come as soon as 3Q21, could trigger production rate increases and provide an order-positive tailwind for BA. We maintain our Overweight given potential upside due to possible rate increases in the future, but recognize it might still be too early for an announcement today due to risks with China.

Oversold Going into the Quarterly Print

On Boeing, investor expectations are low, but progress on the 737 MAX provides incremental positive news. Boeing is reportedly moving through its 737 MAX inventory as demand grows and aircraft lessors noted at our Virtual Paris Air Show that airlines that cancelled narrowbody orders during the worst of COVID-19 want some of their slots back. We updated our BCA revenue estimates for 2Q 2021 from ~$4.3bn to ~$6.5bn to reflect revenue arriving earlier in the year than expected. This raises our 2Q Mse revenues from $15.1bn to $17.3bn. We leave our 2021 revenue estimates unchanged at ~$35.3bn. Also, we leave our delivery forecast for full year 2021 unchanged. Notably, consensus revenues for BCA have come down from ~7.3bn to ~$6.7bn over the last couple weeks, more in line with our estimate of ~$6.4bn.