Wide-moat-rated Boeing (BA) reported a difficult quarter as the continued grounding of the 737 MAX and the pandemic’s severe reduction of travel dramatically reduced aircraft deliveries. We are slightly reducing our fair value estimate to $260 per share from $264 as management indicated they do not expect to return to free cash flow positivity until 2022 due to a buildup of 787 inventory.
The consolidated firm reported a sales decline of 29% and a -2.8% operating margin, as the company faces substantial overcapacity from the grounding of the MAX and the pandemic, leading to a net loss of $466 million, or $0.79 per share. We continue to believe the stock is undervalued as we anticipate that secular forces driving air travel will return in a post-COVID-19 world, which would allow the company to continue ramping 737 production past its previous peak of 52 per month, though we think the company has a lot of work to do in its turnaround. We expect that the company’s $27.1 billion of cash and short-term investments will allow Boeing to survive until the macro environment improves.
In narrowbodies, Boeing remains focused on returning the 737 MAX to passenger service, and the company delivered three 737s. There were clear signs of progress toward a return to service during the quarter: the FAA sent out a notice of proposed rulemaking detailing the required changes to the aircraft and is currently in the comment period on the proposed pilot training for the updated aircraft. We continue to anticipate that the company will receive an airworthiness directive this quarter, which would allow the company to resume deliveries, though many customers are requesting to defer delivery due to the pandemic’s effects on their businesses. We expect robust demand for narrowbody aircraft after the pandemic subsides due to the strong relationship between GDP per capita and flights per capita driving increasing flights in populous emerging markets such as India and Nigeria.
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