Thursday, April 22, 2010

Boeing (NYSE:BA): Going with Boeing; Upgrading to Outperform, $98 target - Credit Suisse

Credit Suisse is making a important call on Boeing (NYSE:BA) upgrading the name to Outperform from Neutral with a $98 target price (prev. $72).

Greater Visibility Drives Higher Conviction: In just a quarter, the upturn in the economy has BA discussing rate hikes instead of cuts. History shows that such talk is typically reliable in a cyclical upturn. While overcapacity fears will persist while airlines struggle to turn a profit on low yields, history shows that they’ll simultaneously order and take delivery of new aircraft anyway, especially with fuel prices rising and ECA’s supporting continued credit availability. CSFB acknowledges the stock has run, but from overly depressed levels and see meaningful upside given Boeing’s position as a bellwether in the early stages of a long-cycle recovery.

With an improving economy, an increasingly stable financing environment supported by ECAs and a diminishing trend of deferral requests, their confidence in the 737 backlog has increased and they see improved likelihood of a rate hike by June. Boeing stated on yesterday’s call that it has seen notably higher requests for accelerated deliveries and that the backlog of deferral requests continues to decrease. CSFB believes that the overbooking in 2011 and 2012 is the driver behind upward rate pressure and they expect that Boeing will announce a decision to take rates not only up, but also higher than most are thinking.

CSFB Key Model Adjustments Are More 737s and Better Downstream Gross Profit on 787: 737s are among the highest margin products for Boeing, with an estimated gross margin in the high 20s. Given upward pressure on demand, they see rates rising to 36/month (from 31.5 today) in 2012 with an associated improvement in margins. Assuming 787-8 continues to retire risk over the remainder of the certification program, the firm sees opportunity for a step-up in its gross margin from an estimated 4-5% at first to 7% in late 2012 and 9% in 2013 on declining learning curve and anticipated pool extensions.

Defense: Finally, when the firm took a fresh look at Boeing’s defense business, they determined that things were not as bad as they thought. Several opportunities have emerged and they believe that BDS will see some offset from the F-18 multi-year, international opportunities for F-18, F-15, C-17, P-8 and rotorcraft, a tanker win as well as opportunities in cyber and adjacent markets.

Upcoming Catalysts Are Mostly Positive
CSFB sees numerous catalysts over the next few months that could continue to move shares higher during 2010. In addition to several Wall Street conference appearances, Boeing is hosting investors at the end of May at its annual investor day. They expect BA to deliver more positive news on 787 testing progress, commercial aircraft demand and an improved aircraft financing landscape.

Big Forecast Boost, Upgrading to O/P: Embedding increased BCA rates (737 to 36/mth in mid-‘11) and margins (737, 787), plus slightly improved BDS revs (F-18, tanker) and margins, CSFB 2011 est. rises $0.76 to $5.27 (Street $4.66). 2012 rises $1.23 to $6.15 (Street $5.35) on 787 margin boost, a full year of 737 at new rate, share repurchases and diminishing pension headwind. Regarding TP, improving macro visibility is driving multiple expansion, prompting to the firm to adopt historical 15.9x P/E multiple on FY2 ests. to achieve a 12-month TP of $98, which yields 32% upside and an upgrade to O/P.

Notablecalls: While Credit Suisse is admittedly somewhat late with their call, they are upping their EPS, pricing & delivery estimates way above consensus. They also see some n-t catalysts that should support the stock.

Technically the stock is about to break out to new 52-week highs & may see further buy interest once the magical $75 level is broken.

I'm thinking the stock will trade above the $75.50 level and I would not be surprised to see it trade towards $76 today. That's my ultra s-t view.

For those with more patience, 4-5 pts of upside over the next month or so sounds realistic.

1 comment:

db said...

and csfb does it again... nice job picking this up. great price action, especially in this down tape.
excellent work.