Despite the slumping market for widebody jets, a new report takes a positive view of the outlook for Boeing thanks to improving cash flow, prospects for a higher dividend and a continued strong market for the reliable 737.
In the report, Cowen & Co. analyst Cai von Rumohr reiterated an outperform rating on Boeing and set a price target of $175.
Boeing shares closed Wednesday at $132.64. Year to date, Boeing is down about 8%, making it the second worst performer in the Dow 30. Only Disney, down 11% has done worse. The Dow is up about 6% year to date.
Bearish views of Boeing have dominated this year for three reasons, von Rumohr wrote. Orders for the 777 are declining due to the expected 2020 introduction of the 777X; the 787 program has $27.7 billion in deferred production costs that must be amortized; and “the long air transport upcycle is running out of gas.
“Bears are right to be concerned with the coming decline in the 777’s profit contribution,” he wrote. “But they don’t give full credit to the probable 737 profit ramp, which should offset most of the 777 drop.
“We estimate that 737 gross profit contribution will increase by $1.8B from 2015 to 2019, offsetting most of the 777 decline,” he said.
Boeing said it will ramp up monthly 737 production to 52 in 2018. Demand for the world’s airplane workhorse remains strong.
Globally, domestic traffic is up 5.1% year to date, according to the International Air Traffic Association. That is a good sign for the 737 and the Airbus A320, the two narrowbodies that fly the bulk of the world’s domestic routes. Boeing has a backlog of 4,404 orders for the 737 and “delivery positions are oversold through 2019,” von Rumohr said.
“737 revenues should rise by an estimated $6B+ from 2015 to 2019, and even with the delivery mix shifting to the MAX, we think profit accrual rates can increase,” he said. “Work on the 737 MAX appears to be moving ahead smoothly.” First delivery of the 737 MAX is expected in 2017.
Von Rumohr said he anticipates Boeing will increase 737 production to 57 a month in 2019, even as it trims 777 production from seven to four or five a month and moves very slowly to boost 787 production from 12 to the stated goal of 14 a month.
Investors are overly worried about the 787’s deferred production costs, von Rumohr said, noting “bears obsess over 787 accounting and argue that BA will have to take a huge forward loss because the program’s $27.7B in deferred production costs means that the 869 remaining deliveries in the accounting block will have to amortize $36.1MM per copy to avoid a charge.”