Shares of commercial airplane-builder Boeing (BA 4.30%) look ready to take off, says investment bank Morgan Stanley in a note out this morning, and could even rise as much as 80% in price over the next 12 months.
Investors seem at least partially swayed by the argument, and Boeing stock is up the first 2% out of those 80% as of 11:05 a.m. ET Wednesday.
So what did Morgan Stanley say that so pleased Boeing investors today? Basically, it boils down to: Don’t worry (about the 737 MAX), be happy.
Last week, Boeing stock got hit on a bit of bad news, which included reports that China’s Xiamen Airlines has elected to buy A320neo aircraft from Airbus rather than 737 MAXes from Boeing. This news, plus the usual market volatility, combined to drive Boeing shares down about twice as far as the rest of the S&P 500 last week. But according to Morgan Stanley, this was an overreaction.
China notwithstanding, Morgan Stanley sees a strong “737 MAX order book” at Boeing, with enough orders coming in to support an accelerated production rate (and therefore accelerated sales) for Boeing. Currently churning out only about 31 MAX aircraft per month, MS thinks Boeing could accelerate that rate to 37 planes per month by next year, then 44 per month in 2024, and 51 per month in 2025, according to a note reported by StreetInsider this morning.
Thus, Morgan Stanley is predicting that sales of Boeing’s most popular plane could grow as much as 65% over the next three years. According to the analyst, the revenue and profits this could generate for Boeing imply a stock price 80% higher than where Boeing trades today — about $233 per share within 12 months.
Granted, Boeing stock doesn’t really look like that right now. With negative trailing profits and negative free cash flow, Boeing stock actually looks like kind of a mess. But consider:
If consensus projections are right, by 2025 a revived Boeing could grow from the $0.38 per share profit (that it’s expected to end up with later this year) to earn $11.90 per share three years from now — then double those earnings again over the succeeding five years. When you consider that $11.90 per share implies only about a 20 P/E on Morgan Stanley’s target price, I could see how a Boeing growing at 20% or so annually might be worth $233 a share.
My main concern is that even if Morgan Stanley is right, we won’t know for sure that it was right for several more years. Personally, I’d be a lot more comfortable paying 20x earnings for Boeing stock after it’s proven it can earn enough to deserve a 20 P/E, than three years before it’s proven that.