Industry Overview

The aviation network in the United-Kingdomstands at third largest in the world and the second-largest in terms of aerospace manufacturing sector. Due to nosedived travel demand amid the Coronavirus-induced restrictions, the United Kingdom's airlines have been asking the government to extend the wage support scheme until June. Meanwhile, Boeing has been dumping dividend and suspending some operations. However, as airline carriers are set to relaunch flights gradually with restrictions, it has been bringing some positive market sentiments. Also, the CEO Gary Kelly (Southwest Airlines), stated yesterday that Boeing 737 Max aircraft which is currently grounded could fly again by late 2020.

Boeing Company - Earnings are Impacted by Nosedived Travel Demand

Boeing Company (LON: BOE) is operating as an aerospace Company, which develops and markets commercial aircraft and systems for defense, space and security. It operates with five segments - Commercial Airplanes; Boeing Capital; Global Services; Defense; Space and Security.

First-Quarter Results (as on 29^th April 2020)

(Source: Company Website)

The Group reported a significant impact in performance due to COVID-19, as revenue was declined by 26 per cent to USD 16.9 billion in Q1 FY20 from USD 22.9 billion in Q1 FY19. The GAAP loss per share stood at USD 1.11, while the non-GAAP loss per share stood at USD 1.70 in Q1 FY20. However, Boeing has adopted several measures to manage short-term liquidity such as reducing operating costs, drawing on a term loan facility, suspending dividend and share repurchase. Regarding liquidity, the Group reported USD 15.5 billion in cash and marketable securities at the end of the first quarter, while debt was USD 38.9 million. Further, the Group reported USD 439 billion in backlog at the quarter-end.

Share Price Performance

Daily Chart as on 22^nd May 2020, before the market close (Source: Refinitiv, Thomson Reuters)

BOE’s shares were trading at USD 139 on 22^nd May 2020, up by 0.10% against the last day closing price. Stock's 52 weeks High is USD 391.60 and Low is USD 89.20.

From the technical standpoint, 3 days, 9 days and 14 days relative strength index of the stock was unfavourable and price could fall further from the current trading level.

Valuation Methodology
 

Valuation Metrics

(Source: LSE)

As on 30^th April 2020, the EV/EBITDA multiple of the BOE was 11.9x, which was higher as compared with the Aerospace & Defense industry of 8.4x, respectively, reflecting that the company is trading at a higher multiple as compared to its peers.
 
Key Risks
The grounding of 737 MAX and a steep fall in demand amid the rapidly evolving COVID-19 disruption putting significant pressure over the revenue and profitability. The Federal Aviation Administration has criticised 737 Max over safety concerns.

Conclusion
The outbreak of COVID-19 and resultant travel restrictions are affecting the various aspect of the business such as supply chain stability, airline customer demand and production continuity. Meanwhile, the Group has decided to streamline roles and organization restructuring; hence, it introduced a voluntary layoff program and reduced the overall staff. Moreover, the Company has taken several measures to slash operating costs and defer expansion plans.

Based on the above rationale, we have given a “Watch” recommendation at the current price of USD 139.00 (as on 22nd May 2020, before the market close at 11.05 AM GMT+1), while we look for any upcoming catalysts in the near term.

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