Boeing's China Prospects Bright: Should You Buy the Stock Now?
The Boeing Company BA recently released its 2024 Commercial Market Outlook (“CMO”) for China, wherein the company expects the nation’s commercial fleet to grow 4.1% annually during 2023-2043. This reflects a remarkable growth opportunity for the American jet giant, with Boeing being the largest customer of China's aviation manufacturing industry.
Notably, air travel in China is projected to become the world's largest traffic flow over the next 20 years. This surely should benefit Boeing’s prospects in this country, with the company’s activity in China contributing more than $1.5 billion annually in direct support of the nation’s economy.
Boeing-China Partnership
Boeing and China have been in a solid partnership for a long time. Since 1973, Boeing has delivered more than 2,000 airplanes to China’s airlines and leasing companies, thereby making the nation the biggest market for Boeing aircraft outside the United States.
Moreover, while China has a component role in every current Boeing commercial airplane model, more than 10,000 Boeing airplanes fly worldwide with Chinese parts and assemblies.
So, while China benefits from receiving the world-class commercial fleet and aviation services of Boeing, the latter enjoys the perk of procuring low-priced aircraft parts from China compared to the United States.
With the latest CMO projecting China to have the world's largest widebody fleet and Chinese carriers estimated to demand for aviation services worth $780 billion, Boeing’s long-standing partnership with this nation should help the jet maker to reclaim its superiority in the commercial aerospace market.
Notably, Boeing’s commercial airplane business has been delivering poor performance for quite some time now, with two of its major commercial jet models, 737 and 787, suffering from multiple critical challenges, with quality control issues being significant among those.
Boeing’s YTD Performance
Boeing’s shares in the bourses have been staggering for quite some time due to persistent quality control issues with one of its major commercial programs, along with some critical challenges posed by the commercial aerospace industry. Evidently, shares of America’s largest passenger aircraft maker have lost 33.5% year to date, underperforming the Zacks aerospace-defense industry, the broader Zacks Aerospace sector, as well as the S&P 500.
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The company also lagged the year-to-date performance of two key commercial jet makers, Embraer ERJ and Textron TXT, whose shares surged 82.6% and 12%, respectively.
However, a company’s share price performance is not the only parameter one should consider while investing. Considering the fact that Boeing still remains one of the world’s two major jet makers, the other one being Airbus EADSY, a prudent investor must take into account other aspects of the company like its profitability, earnings prospects and risks (if any) to investment.
Dismal ROIC
The stock’s trailing 12-month return on invested capital (ROIC) not only lags the industry’s return but also reflects a negative figure. This indicates that the company's investments are not generating sufficient returns to cover its costs.
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Risks One Should Consider
737 Max remains a major challenge that has been persistently affecting Boeing’s commercial airplane business. In the latest development on this issue, in the second quarter of 2024, revenues from its commercial airplane segment suffered a 32% year-over-year plunge, with lower 737 deliveries being a key driving factor. The company also suffered major cancellations in its aircraft orders, primarily concerning the quality control issues for its 737 jets.
In addition to such internal issues, industry challenges like shortage of skilled labor and steadily rising fuel prices pose a threat to Boeing, especially to its commercial airplane division. Moreover, due to persistent supply-chain challenges, aircraft manufacturers as well as aerospace parts suppliers are struggling to keep up with the soaring demand, thereby limiting the potential for timely delivery of finished aircraft.
Will the BA Stock Continue to Lag or Recover?
Despite facing the near-term challenges, Boeing’s long-run prospects remain bright. The fact that BA also enjoys a solid presence in the defense and space markets provides it with a solid product diversity.
Also, the impressively growing aviation services market offers notable growth opportunities to the company. To this end, Boeing expects a $4.4-trillion market opportunity for commercial aviation support and services over the next 20 years. This should bode well for its global services business unit over the long run, with a total backlog of $19.49 billion as of June 30, 2024.
Upbeat Estimates
A quick sneak peek at BA’s 2024 and 2025 earnings estimates mirrors an annual improvement. The Zacks Consensus Estimate for 2024 earnings is pegged at a loss of $4.26 per share, which indicates a solid improvement from the prior-year reported loss of $5.81. The 2025 estimate also reflects similar growth.
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Trading at a Discount
In terms of valuation, BA’s forward 12-month price-to-sales (P/S) is 1.24X, a discount to the industry’s average of 1.58X. This suggests that investors will be paying a lower price than the company's expected sales growth compared to that for its industry’s average. The stock is also trading lower than its five-year median of 1.43.
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Should You Make an Entry Now?
To summarize, despite the solid earnings growth potential for Boeing and the company trading at a discount, it is not advisable for investors to buy this stock right now. One should wait for a better entry point, considering BA’s poor ROIC as well as persistent quality control issues associated with its 737 program.
However, those who already own it may continue to do so, taking into account Boeing’s product diversity, upbeat earnings estimate and solid growth opportunities in aviation services. The company’s Zacks Rank #3 (Hold) further supports our thesis.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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The Boeing Company (BA) : Free Stock Analysis Report
Embraer-Empresa Brasileira de Aeronautica (ERJ) : Free Stock Analysis Report
Textron Inc. (TXT) : Free Stock Analysis Report
Airbus Group (EADSY) : Free Stock Analysis Report