Boeing (BA) reported a big loss in its Q1 earnings report in April — $1.70 per share (pro forma). Most analysts forecast that the airplane maker’s Q2 report could be even worse — a $2.20 per share loss. And yet, despite this prospect looming on the horizon, and the potential that Boeing could miss it and turn in a fourth straight quarterly earnings “miss,” investors have bid up Boeing shares an incredible 71% over the past three weeks.
Cowen analyst Cai Rumoh thinks investors are being dangerously overoptimistic.
The 5-star analyst made no bones about what he thinks is at fault for Boeing’s underperformance, and believe it or not, it’s not coronavirus — but the Boeing 737 MAX. Investors, posits Rumohr, are latching onto reports of a modest increase in air traffic, combined with Boeing’s announcement that it has resumed a slow pace of 737 MAX production, to mean that things will soon get back to normal for Boeing, and the company will soon begin selling 737 MAXes in quantity.
But not so fast, says Rumohr.
When Boeing told investors back in April that it expected to deliver “the majority” of its more than 450 completed 737 MAXes within a year of receiving certification from the FAA (possibly next quarter), it was assuming a quick rebound in travel trends encouraging airlines to take delivery of all the airplanes they had ordered, as soon as they could possibly be delivered.
That’s not likely to happen, however, and for two reasons. First, as details of the “compensation agreements” Boeing is working out with its customers reveal, many of these airlines have been asking to defer their deliveries.
And second, Rumohr warns that receiving a certification from the FAA for the MAX to return to flight in Q3 is not assured, inasmuch as “COVID-19 flight restrictions” have put the date of a hoped-for FAA certification flight in doubt, and also may delay flight simulator training required by the Joint Operations Evaluation Board (JOEB). In Rumohr’s view, it’s entirely possible the MAX won’t resume flying before September or later.
Accordingly, Rumohr believes that Boeing might deliver only 275 to 300 MAXes next year, which is barely half what some other analysts are estimating. And when you add to the backlog of already-built planes, the 10 to 20 jets Boeing says it will be building monthly to help keep its suppliers solvent, this could leave Boeing with more than 350 of the planes still sitting in inventory, undelivered, by the end of 2021.
Should this turn out to be the case, it will both crimp Boeing’s cash flow for years, and put analysts’ hoped-for earnings at risk. Indeed, rather than the negative $6.1 billion in free cash flow and the $2.20 per share pro forma loss that most analysts forecast this quarter, Rumohr is predicting negative FCF of $9 billion, and a per share loss of $2.75.
And that’s just this quarter.
For the full year, Rumohr says Boeing could conceivably lose $7.90 per share, a loss 24% worse than his previous prognosis. As for free cash flow … that might not return before 2022, if then. And seeing as Boeing will have worked up a debt load in of about $32 billion by “midyear,” and must begin paying that down once free cash resumes flowing, the analyst doesn’t see Boeing generating enough extra money to even consider resuming dividend payments before 2024.
Long story short, the most Rumohr can rate Boeing stock at this point is “market perform” with a $184 price target — and even that might be generous.
Wall Street appears to agree with Rumohr that caution is required here. Out of 21 analysts tracked in the last 3 months, 9 rate BA a Buy, 11 say Hold, while 1 recommends Sell. The 12-month average stock-price forecast stands at $169.21, marking nearly 27% downside from current levels.
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