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Morningstar | Boeing's Commercial Production Ramp Drives Our $335 Fair Value Estimate Despite Indefinite MAX Ban

We consider shares for wide-moat Boeing to be overvalued compared with our $335 fair value estimate, even after we tuned our forecast 10-year Stage I period. We expect Boeing’s backlog of nearly 6,000 aircraft will allow it to boost production into the next decade and drive commercial aircraft growth, even with the near-term MAX impasse. With 737 deliveries falling in 2019 to a production rate of 42 per month from 52, we expect operating cash flow will recede before rebounding in 2020. The 2020 production recovery in our model brings deliveries to over 1,000 aircraft and raises operating cash flow almost $7 billion higher than 2018 at $22.2 billion.

In our updated model, we still assume recent U.S. defense budget increases will support growth. Boeing's wins on the T-X trainer, MQ-25, and the UH-1N replacement, as well as the initial phase of GBSD (modernization of U.S. land-based nuclear missiles), each stand to grow revenue in our Stage I forecast period. That said, we think margin headwinds will stem from development activities on recent programs wins over the next few years. Boeing’s expansion into services should contribute another leg of growth, but we think the lack of new aircraft programs will limit Boeing’s foray into aftermarket services. As such, services revenue in our model falls short of Boeing’s $50 billion target.

Boeing’s commercial airplanes unit will make the greatest contributions to its earnings growth and cash generation over our forecast period, in which we project margins gravitating toward 15% by 2020. Despite the recent MAX groundings, we think the 737 will eventually ramp to 57 aircraft produced per month and top out in the mid-60s next decade. We also expect moderating research and development plus improved 787 margins (related to supplier pricing step-downs, the introduction of the 787-10, and block extensions) will improve margins.

The cash impact from the suspension of MAX deliveries remains a timing issue in our view since Boeing will eventually collect cash from its customers upon delivery of the MAX inventory. In the meantime, we estimate a cash impact for each MAX produced but not delivered of around $15 million per aircraft based on cash COGS less pre-delivery payments from customers, which we assume are continuing. Boeing’s production cut will reduce the total cash impact on Boeing because variable costs linked to building 737 MAXs will fall. We think there’s a decent probability aircraft remain grounded for six to nine months. This is predicated on Boeing's software fix not yet approved nearly three months out from the initial grounding.