J.P. Morgan Still Sees 20% Upside for Boeing (BA) Stock


What was supposed to be a routine product update has turned into a disaster for aircraft manufacturer Boeing (BA). It’s 737 Max 8 aircraft — an updated version of the world’s most popular line of planes, the 737 — debuted commercially not even two years ago, but is already facing an uphill climb as two of these new jets crashed since October. While this isn’t Boeing’s only disastrous start to a new plane — multiple 727s crashed shortly after that aircraft was launched in the 1960s — the news is nevertheless bad for the company, as reflected by a stock price that has dropped about 20% in March.

But even amid the selloff, analyst Seth Seifman of J.P. Morgan has maintained his Overweight rating on the stock with $450 price target, which implies nearly 20% upside for the stock from current levels. (To watch Seifman’s track record, click here)

The crash of Ethiopian Air flight 302 at the beginning of March led to a wide-range grounding of the 737 Max 8, as the crash was the second in under six months. At fault in the Ethiopian Air crash appears to be what downed the Lion Air flight in October — a faulty MCAS software system, designed to automatically rectify the plane if it is stalling. Assuming investigators find that the two crashes were a result of the software system, Boeing is will need to update the software, as well as receive FAA certification, before the plane can fly again.

As well as grounding all planes, Boeing has all suspended deliveries of the new aircraft. Seifman says, “the clearest impact of the delivery halt on financials will be the lack of final cash payments for the aircraft Boeing will continue to build.” So while deliveries are suspended, the actual building of the plane — and expenses incurred — will continue.

But while many companies wouldn’t be able to afford building something without payment, the analyst says, “financially, Boeing can manage this inventory build for several months.” In 2019, Seifman believes “Boeing will generate $9-10 bn of FCF in 2019 ex the MAX and so the rest of enterprise can help with the inventory build, with the obvious implication that share repurchases will be lower this year and reduced repo for a time is something we think investors must already expect.”

All in all, there is a lot at play when it comes to judging Boeing’s stock amid this crisis. But at the end of the day, investors are confident the company will return a safer airplane, one that will seamlessly be integrated into airlines’ fleets, as was expected before the two crashes. In the interim, Boeing’s financials are strong enough to withstand any potentially negative effects, which could not be said about most companies. This is among the reasons the Wall Street community is still bullish on the company, with 16 analysts rate BA stock a Buy, five say Hold and only two believe you should sell. The average price target among these analysts stand at $431.13 on the stock, representing a 15% upside. (See BA’s price targets and analyst ratings on TipRanks)

 

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