Q&A: Boeing Analysts Answer Top Fears

Called the "most debated stock in A&D," Boeing Co BA has battled from the trenches over the past one year.

Attempting to dispel confusions regarding the stock, Deutsche Bank's Louis Raffetto wrote a question-and-answer type note.

Deutsche Bank currently rates Boeing at Buy with an attached price target of $160.00.

Question 1: Is The Cycle Over?

While the question is the most frequently received, Raffetto was quick to emphasize that the question is extremely and unhelpfully broad. Therefore, he addressed the three most prominent "cycles" Boeing investors are likely to ask about.

It's quite likely that the book-expansion cycle has come to a conclusion, according to Raffetto.

Related Link: Boeing Development Ahead Of Schedule

However, the delivery cycle may not have reached its apex yet, "[T]he answer is different given what we see as still elevated demand above supply, particularly in the narrow-body market."

Furthermore, in regards to the cash/earnings growth cycle, the analyst also thinks the cycle is not over yet, "given the still visible growth in 737/787 deliveries compounded by the increasing cash flow improvement in the 787."

Question 2: What Is The Profit Potential?

Regarding the profit potential of the 787, Raffetto stated, "The margins on mature programs at Boeing today are about 20 percent pre-R&D EBIT margins or close to 30 percent gross margins. The comparative gross margins on the 787 today are -5 percent!"

He elaborated that Deutsche Bank expected the gross margins to reach a break-even point by the second or third quarter, and therefore have "conservatively modeled unit gross margins for the 787 in '17 at 6 percent."

Question 3: How Low Can Production Rates Go?

Raffetto commented that production rates for the 777 were lowered, "consistent with expectations."

Looking forward, Raffetto surmised, "The net result will be a 15 percent decrease in deliveries in 2017 vs. 2016. Given the folding in of the 777X in 2018, the deliveries of 777s will step down again by 15–20 percent toward 65–70 777 deliveries (consistent with our model). Into 2018, we estimate that about 2/3rds sold-out leaving still more work to be done and 2019 is worse."

Question 4: What's The Cash Flow Potential?

"We see Boeing's cash flow per share in '16 of $11.50 growth at a mid-teen CAGR as absolute cash expands at 8 percent and share count reduction adds another 5 percent to the CAGR," according to Raffetto.

Question 5: Is Boeing Investible?

Against a backdrop of low oil, a strong U.S. dollar and the potential for more products within the space, the investibility of the issue has arisen.

Raffetto explained, "Clearly part of the reason for the rebound in shares of BA has been the rebound in oil and the stabilization of previous dollar strengthening. Those two macro drivers were increasingly the probabilities in the minds of investors that the validity of Boeing's backlog was quickly about to be tested."

"If oil and f/x had continued in their downward spiral unabated, we imagine compounding fears in a pick-up in deferral/cancellation activity would have continued," Raffetto concluded.

Justification For Reiteration

"The tug of war between bulls and bears of Boeing continues with a relatively volatile first quarter for shares," Raffetto said. "We remain squarely in the Bull camp seeing the cash flow story the most compelling in the sector. We're not of the mindset to dismiss concerns on slowing demand in orders nor f/x driven competitive threats and selective program risk (&&&). However, despite the recent move, shares trade under 10X '17 FCF, offer up a 3.3 percent dividend yield with a DD CAGR trajectory of growth from here. We have no expectations of growth investors returning, but income/value investors are here and momentum could follow."

At time of writing, Boeing was up 1.85 percent at $136.44.