United Airlines’ massive order from Boeing makes it investment-worthy

New assignment! Double cheeseburger, fries and a coke? Even better. I think. The news came out early Tuesday morning. United Airlines (UAL), again a profitable company after the past two quarters, had placed an order with Boeing (BA) for new commercial jets.

In full disclosure, I bought some BA stock in the pre-opening hours this morning before I knew I was going to be writing this piece, so I’m long BA small.

The deal is this. United has placed a new order for 100 787 Dreamliner aircraft with an option to purchase an additional 100. These aircraft will be delivered between 2024 and 2032 and will replace the aging 767s and 777s. United’s entire widebody fleet consists of aircraft manufactured by Boeing.

More international flights have been added to United’s daily schedule as post-pandemic travel has continued to increase and fleet modernization has become necessary. CEO Scott Kirby explains that replacing Boeing wide-bodies with Boeing wide-bodies instead of switching to the Airbus (EADSY) A350 makes sense in terms of storage given its smaller size.

The order also includes 56 additional 737-Max aircraft with an option for 44 more. This is in addition to existing orders for 300 new single aisle (narrow-body) aircraft placed last year with both Boeing and Airbus. All told, at list prices, this deal is worth (questionably) tens of billions of dollars to Boeing.

This one…

Readers may have noticed that JP Morgan five-star (at TipRanks) analyst Seth Seifman on Monday reiterated his “overweight” rating on Boeing and raised his target price from $170 to $200. This was ahead of Tuesday morning’s news and in response to reports that Air India would place a potentially very large (as many as 500 aircraft) order with both Boeing and Airbus.

On Boeing

Boeing will report the company’s fourth quarter at the end of January. The company is coming out of a difficult third quarter. In fact, Boeing is coming off a rough few years, recording losses in 12 of the past 15 quarters. Much of that is due to the well-documented problems with some of the company’s aircraft, most notably the 737-Max which was involved in more than one fatal accident. The rest was due to the pandemic.

That said, you still have a large US industrial company here that employs over 140,000 people, is one of two global companies making commercial aircraft in large numbers and remains a major defense/government contractor. The other major defense contractors have all knocked the ball out of the park this year. The other defense contractors are not heavily involved in the manufacture of civilian durable goods.

For the current quarter, Wall Street is looking for adjusted EPS (GAAP EPS will be higher) of 0.24, but estimates are all over the map. The range of 15 analysts’ expectations on the sell side is that this number will land somewhere between a loss of $1.36 and $1.30. In other words, these analysts have no idea. Sales are printed at $19.5 billion, within a range of $16.9 billion to $23 billion. I can’t make this up.

For the third quarter, Boeing posted positive free cash flow for the second time in four quarters. That said, free cash flow for the last 12 months as of September has been negative as the company faces negative free cash flow for a possible fourth year in a row. Positive free cash flow is a key goal for this company for 2022, and it was stated as such several times during that press conference in September.

Balance

The balance sheet is remarkably stable for a company that has been through what Boeing has been through. I didn’t say anything overtly positive. I said stable. As of September, the cash balance was $14.257 billion, up from the previous two quarters. Inventories for Boeing were almost unchanged from literally every quarter ever, at $79.777 billion. The current ratio of 1.22 is fine. The quick ratio (without inventories) of 0.21 isn’t something I’d “high five” for, but it’s very normal for this company.

Total assets are $137.558 billion, including $10.416 billion in “goodwill” and other intangible assets. I have no problem with that. Total liabilities less equity are $155.193 billion, including $50.59 billion in long-term debt, of which nearly $5 billion is classified as current. While retirement-related liabilities still exceed $11 billion, it will be less than $20 billion in 2020.

Is this a good balance? It won’t be winning gold stars or being called “forty” any time soon. That said, it’s functional for now. The debt burden must be reduced relative to the available cash. Hard to fault the level of stocks especially when orders are about to pop.

Thoughts

Personally, I think the name could be investment worthy considering that the United order is not a one-off and several airlines need to modernize. The name is a decent enough trader anyway.

I’m not fond of the recent history of free cash flow and I’m not fond of that balance sheet. That said, large orders have a way of correcting these things.

Tell me what do you see?

Double bottom invert with a $173 pivot?

Double bottom with a $142 pivot, followed by a cup with handle with a $179 pivot?

What you see matters. It matters how you plant. Daily MACD has turned for the better. Relative strength is strong without being perversely overbought. Note the “golden cross” (50 days SMA crosses the 200 days SMA).

If you see the first chart like me, well, I’m long the stock, although not by much. My target price is 199 euros. I’m buying the shares up to the 21-day EMA as part of an effort to build my long. I panic when I see my $173 pivot fail.

If you see the second chart, the first pattern did what it was supposed to do. The $142 pivot created a breakout that went up to $173. The handle cup with the $179 pivot would set a target price of $206. The add and panic levels would remain the same.

That’s how I see it of course. How do you see it?

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