Tuesday, October 20, 2009

Boeing (NYSE:BA): Downgraded to Underweight at Morgan Stanley, target to $43

Morgan Stanley has turned negative on Boeing (NYSE:BA) downgrading the stock to Underweight from Equal-Weight while lowering their target to $43 from $50.

According to the analyst BA shares may face downward pressure given likelihood for further delays on the 787, negative 2010 cash flow, poor aircraft order demand and negative EPS revisions ahead.

1) Further delays on 787 – Morgan Stanley notes they have concerns that first flight will be pushed to 2010 and even more concerned first delivery could be 6 months delayed to Spring 2011. Technical challenges may delay first flight, but either way it is something of a distraction. Bigger issues are ahead. They would not be surprised to see delayed first delivery and program ramp given scope of redesigns, weight overruns, high fuel burn, and high manufacturing costs. If our concerns are borne out, 787-8 may fall short of contractual guarantees, entitling airlines to remuneration. BA still has its work cut out for it and while they trust management’s effort, they believe that the risk of unforeseen delays is not baked into the stock.

2) Cyclical downturn ahead – Morgan is cutting their mature plane forecasts, projecting a trough in 2011 vs. Street’s 2010. They also project a book:bill less than 1 next year; BA’s stock price to orders is still 0.82. They are slicing 2010-2011 EPS & expect that over time consensus will follow.

EPS estimate cuts: From $4.50 to $3.85 in 2010 and from $4.85 to $3.55 in 2011

3) Mounting cash outflow ahead – i) Enduring 787 challenges, ii) supplier claims which likely come to a head next year, iii) fewer less profitable aircraft mix and iv) possibly higher BCC financing point to sizable stresses on BA’s balance sheet 2010-2011. Firm projects negative cash flow of $2.7B (next year and a pale recovery (breakeven in 2011) through 2012.

Street estimates too high – Morgan believes consensus estimates may be too high and declining, thus the shares may not prove to be as cheap as they first appear. At $53, BA is trading at 12.5X consensus 2011 EPS of $4.26. They are meaningfully lower in 2010-2011 EPS vs. consensus, projecting $3.85 in 2010 and $3.55 in 2011.

Notablecalls: I think that at least in the short term this is an important sentiment call in BA. Morgan Stanley is not only highlighting 787 related problems but also supplier claims and a potentially less profitable mix which should result in hefty negative free cash flow.

Note that late last week FlightBlogger highlighted another possible 787 delay but the market didn't pay much attention. The stock gapped lower on Friday but squeezed higher helped by Boeing's PR team that sent out another 'all is well' message via Dow Jones.

It now looks like Morgan Stanley isn't buying the PR hype anymore so I guess the stock is set to give back at least the squeeze gains (and dim sum).

So I think BA will trade closer to $51 level in the s-t.

Link: Unanswered questions, cautious optimism define 787 wing fix

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