Air travel is picking up, benefiting the entire aerospace industry.
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Stock in Boeing caught an upgrade Tuesday as a Wall Street analyst noted that things are looking up for the commercial aerospace giant and the industry as a whole.
Boeing stock (ticker: BA) was up 3% on Tuesday. The S&P 500 and Dow Jones Industrial Average, for comparison, had risen about 0.3% and 0.4%, respectively.
Cowen analyst Cai von Rumohr upgraded the shares to Buy from Hold and raised his target for the price to $290 from $240 a share. His belief that “a change is gonna come” underpins his more bullish view.
The first change is air traffic. Air travel is picking up after a moribund, pandemic-affected 2020. More than 1.9 million people boarded planes in the U.S. on Monday, the highest level since March 2020. Over the holiday weekend, U.S. commercial air traffic was down less than 30% compared with 2019, a smaller drop than on recent weekends.
More people on planes is good news for all aerospace-related stocks.
Von Rumohr also sees a change coming in demand for commercial aircraft. Governments and airlines are increasingly focused on reducing emissions of carbon dioxide, and new planes emit less of the greenhouse gas, so replacement demand could rise faster than investors expect. Lower operating costs, of course, are an additional reason to replace planes.
He also pointed out that the global fleet of wide-body, or twin-aisle aircraft, is older than the narrow-body aircraft in use. That makes them more likely to be replaced. A snapback in wide-body order rates has the potential to help Boeing a little more than Airbus (AIR.France) because Boeing has a bigger market share in wide-bodies. Still, any order pickup will benefit both.
As air traffic returns to normal, potentially emboldening airlines to buy, von Rumohr projects Boeing will generate $21 of free cash flow per share by 2024. That cash flow supports his $290 target price.
Right now, Boeing is burning through cash because deliveries dropped dramatically amid Covid-19 lockdowns. In 2017 and 2018, before the pandemic, and before the 737 MAX jet was grounded in 2019, Boeing generated more than $20 in free cash flow per share.
While the S&P 500 trades for a free cash yield—essentially free cash flow divided by the stock price—of about 3%, Boeing has historically traded for a yield closer to 6%. With $21 in free cash flow and a yield of 6%, a share price of $350 is possible by 2024, offering attractive returns in coming years with shares trading at about $250.
With the upgrade, 53% of analysts covering the stock rate shares at Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 55%.
Boeing was a much more popular stock before the pandemic and the grounding of the 737 MAX jet between March 2019 and December 2020. In February 2019, more than 76% of analysts covering the company rated shares Buy. The share price was almost $400.
Boeing stock rose 1% in 2019 and dropped 34% in 2020. Shares are up about 18% year to date, better than comparable gains of the overall market.
Write to Al Root at [email protected]
