The grounded 737 MAX’s “are a source of cash and provide liquid finished inventory,” one analyst argues.
Photograph by David Ryder/Getty ImagesBoeing closed on a $25 billion bond deal on Monday, bringing more cash into company coffers needed to weather the Covid-19 pandemic. That was enough for one analyst, who is recommending the stock.
In a twist, Benchmark analyst Josh Sullivan also sees the company’s 737 MAX as a near-term benefit, to help the commercial aerospace giant avoid another trip to debt or equity markets.
Sullivan is bullish on Boeing (ticker: BA) shares, rating them Buy. He has a $180 price target for the stock.
“The $25 billion bond portfolio [Boeing] raised in the last week was reportedly upsized from [about] $10 billion given investor demand, and removes medium-term needs for a government bailout,” Sullivan wrote in a Tuesday research report. “Further, the [roughly] 450 grounded 737 MAX’s are a source of cash and provide liquid finished inventory which can efficiently fill the ambiguous fits [and] starts of an airline recovery.”
The MAX still has troubles, so labeling it as a positive for Boeing is certainly a novel idea. The jet has been grounded worldwide since mid-March 2019 following two deadly crashes inside of five months. Boeing has been working for months to fix the plane and bring it back in to commercial service. Management thinks it can deliver MAX jets to airline customers starting in August, but it has yet to be recertified to fly.
When Boeing delivers the planes, airlines and air-leasing companies will pay remaining money owed on the purchase. (Customers pay some money ahead of time to help finance assembly.) That will bring additional cash in the door. Boeing has built about $15 billion of inventory over the past year, much of it tied to 737 MAX jets produced and parked while the plane has been grounded.
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It might not appear like it, but airline customers will likely be glad to have the MAX. It has lower operating costs than many models and all airlines are focused on reducing costs in the current business environment. Of course, Boeing’s airline customers aren’t flying many jets right now. Almost two-thirds of the global commercial jet fleet is parked because few people are traveling.
The challenging aviation environment is manifesting itself in another way. Boeing will adjust downward the pace of expected MAX deliveries and the amount of MAX jets to be produced in the future. Before the MAX problems hit, the company made about 42 a month. That number will be in the 30s for the next couple of years.
Not everyone is as bullish as Sullivan. Baird analyst Peter Arment still rates shares the equivalent of Hold, with a $143 price target.
“With the question of government dilution out of the way, concerns should now turn to paying the significant debt load off which management highlighted as a first priority when the company returns to cash flow positive,” Arment wrote in a Tuesday research report.
Boeing is paying interest rates between 4.5% and 5.9% on bonds that mature between 2023 and 2060.
High debt and cash burn are big concerns, but the stock is already badly beaten up. Boeing shares are down about 61% year to date, far worse than double-digit comparable drops of the Dow Jones Industrial Average and S&P 500.
The aviation sector has been hammered by the pandemic. Aerospace suppler stocks Barron’s tracks are down about 45% year to date on average. U.S. airlines stocks are down about 60% on average.
Boeing shares were down 3% to $127.47 Tuesday afternoon, on a day the broader market was trading higher.
Write to Al Root at allen.root@dowjones.com
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Buy Boeing Stock Because the 737 MAX Will Become a Provider, Analyst Says - Barron's
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