Boeing Stock Undervalued Despite Delays, Layoffs, and Likely Stock Sale

Key Morningstar Metrics for Boeing

• Fair Value Estimate: $202.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

On Oct. 11, Boeing BA announced $5 billion in charges across several of its most prominent programs and a workforce reduction of as much as 10%, or around 17,000 employees, over the coming months, affecting its beleaguered commercial, space, and defense operations.

Why it matters: Under new CEO Kelly Ortberg and amid acrimonious strike negotiations with the union representing its 33,000 machinists, Boeing is digging deeper to reestablish viable prospects for operating profitability and stave off a credit rating downgrade.

The bottom line: We lowered our profit forecasts over the next two years—and through 2028, in the case of the 777X—which reduced our fair value estimate to $202 per share from $216. We also increased the amounts we expect Boeing to agree to compensate its machinists.

• In the near term, we project severance costs from the announced layoffs to offset payroll savings. In the longer term, our forecasts already called for incremental productivity gains, measured as aircraft deliveries per full-time employee, and we forecast some increase in compensation over time.
• On October 25, the company filed with the Securities and Exchange Commission to issue equity for cash and refinance debt to stave off a credit downgrade. This does not have a material impact on our fair value estimate, as we already discount the firm’s cash flows at a steeper rate than most market participants, using a blend of 8% cost of debt and 9% cost of equity. However, we note that existing equity holders will be diluted by approximately 11%, assuming a $10 billion equity issuance and that buyers at today’s prices will receive shares we believe are worth north of $200.
• While there is some small dilution for existing shareholders, a knowledgeable, patient buyer (there could still be more bad headlines in the next few months) will get shares at a discount.

Key stats: In the name of focusing on its most important efforts, Boeing will recognize $2.6 billion of charges against the delayed launch of the 777X program and will charge $400 million to shut down the 767 freighter program in 2026, producing only Air Force tankers thereafter.

• In defense and space, Boeing is charging $900 million due to increased costs of the T-7 trainer aircraft and $700 million on the KC-46A tanker as it shuts down commercial variants of the 767.