Plenty of industrials have gotten clobbered by worries about a trade war, but Boeing has been serenely flying above it all, and sports a 26% year-to-date gain despite being knocked around a bit on the tariff headlines. This follows 2017’s surge when Boeing’s was the best-performing stock in the Dow Jones Industrial Averagelast year.
However the stock’s long-running success—and the consequent high investor expectations—along with concerns about trade and the industrial cycle, are part of what keeps Morgan Stanley’s Rajeev Lalwani Equal-Weight rated on the stock. He looks at the company’s planned new mid-sized aircraft (NMA), and writes that while it adds execution risk to Boeing shares, building the new planes is likely a good move for the long run.
Boeing first introduced the concept of the NMA three years ago, and Lalwani believes that a decision to move forward with the design is likely to come within a year (although other analysts have debated this timeline). Because it is a “clean-sheet” design, i.e. one that the company is starting from scratch, it could raise the near-term risk profile for the company, he writes, but does set “the stage for Boeing’s long-term vision.”
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The NMA progam’s net present value, inclusive of services, could be about $15 billion (or $25 a share), Lalwani estimates, a relative drop in the bucket given Boeing’s market capitalization of $211 billion, but it could be “pivotal” in terms of Boeing’s competitive position, expansion of services and “smoothing” aircraft-development cycles, even if it comes with interim risk.
He calls the need for the NMA “compelling” for three main reasons. First, it would provide a “proper” response to Airbus’s(EADSY) A321, a leader among larger narrow-body aircraft, that’s outselling Boeing’s recent 737 Max models by around three times. Secondly, it would help with Boeing’s goal of bringing services revenue to $50 billion from $15 billion over a decade, a target that might be difficult with existing aircraft, due to various advantages suppliers have.
Finally, Lalwani writes that the NMA could mean less risk for transition to the 737 redesign. At the moment, the 737 is the “Boeing cash cow,” is due for a “natural refresh” by the end of the next decade. “To minimize the transition risk, we believe lessons from an NMA, that is on a much smaller scale, would be a low-risk way to further experiment with key advances like digital manufacturing,” he writes.
Boeing is up 1% to $370.90 in recent trading. The Industrial Select Sector SPDR ETF(XLI) is 0.1% higher to $78.56.