Unlock: Boeing (BA) Bull Case Pans Out As Expected

It pays to do fundamental research. We were a bit early but right on the money. This lengthy fundamental bull case was presented to clients on August 15 two weeks after BAML cut the stock to Sell. We used that weakness as opportunity to get long. Power breakout today. To learn more about our approach and how you can become a successful trader, sign up for 2 week trial and test drive live chat room with some of the best traders: SUBSCRIBE

I believe after nearly 5 month of consolidation, chart is setting up for breakout from consolidation. Last quarter was messy and it left analysts and investor perplexed to get a good read on fundamentals. Boeing reclassified certain Research & Development charges related to 787 production, resulting in one-time significant accounting shift and hit to P&L. This was further clouded by one-time charges related to Tanker production. When everything was said and done, a clearer picture emerged on July 28 and now I believe investors are returning back to the stock.

Three pillars of outperformance from here —

Improving Margins and Free Cash Flow – 737 is sold out for many years to come, hence the key is margin improvement from learning curve, and FCF improvement in 787 program is underway. Both are running at max capacity with backlog that stretches out a whole decade. Revenues is not issue here. Main issue is margins. Barclays is estimating 30% margin expansion and more than 50% FCF improvement. The lone analyst who sees better result after consensus has taken down FY2017 EPS from $10.40 about 9 months ago to $9.60 currently.

Boeing 737 Max Launch Late 2016 – In early 2016, I briefly mentioned that a significant new catalyst is coming up by year end, launch of 737 Max. Then I reiterated this view on June 16 as recorded in Activity Tracker. Still nobody is talking about this. The first delivery will begin in early 2017 and Boeing already has 3,090 plane order on hand as of March 2016. Remember when Dreamliner was launched in 2013 and consensus was too low while we were buying the stock hand over fist at $65 per share?

Defense Kicking Into High Gear – We often overlook the fact Boeing is not just a commercial jet maker. Major portion of total revenues is Defense and it doesn’t get credit for it. But now the valuation disconnect between BA other other defense contracts (LMT, RTN, GD, NOC) has really widened significantly. I believe the valuation gap will narrow. One of several news in past 3 months related to increasing defense spending. Over the weekend: After a bunch of delays and some penalties, KC46-A tanker program is now approved and ready to go into production. The Air Force will soon award contracts to Boeing for two lots, totaling 19 aircraft, and associated spare parts for a pre-negotiated $2.8 billion combined value.

I believe the news flow is getting better after many accounting changes that led to muted price action in past 5 months. Expecting stock to work higher from here towards $144+ over time.