As Travel Resistance Ebbs, Boeing Stock Earnings Power Comes Into Focus

The Boeing Company (NYSE:BA) reported difficult earnings for the third quarter on Oct. 27. But Boeing stock investors will have much better news to look forward to once production of its 737 MAX jet ramps up.

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Moreover, as airlines around the world experience less resistance to travel once Covid-19 vaccines are prevalent, cash flow will skyrocket. As a result BA stock could be worth significantly more than today, as much as 47% to 82% more.

Once the market can see this light, it will quickly readjust. The shares of the airplane maker will move swiftly higher. And this revaluation is already be starting.

For example, in the past month alone, Boeing is up over 50%, as of Dec. 8. And since the end of October, the stock has moved up $92.18, or 63.8%. However, factoring in the stock decline earlier this year, the shares are up just 15.9% in the past six months.

Forecasting Financials

One way to estimate a stock’s true value is to look at its earnings power. One way to do this is to look at the company’s historical cash flow earnings power.

For example, in the past four years, Boeing posted the following amounts of free cash flow (FCF): $5.9 billion (2015), $7.88 billion (2016), $11.6 billion (2017), $13.6 billion (2018), and -$4.3 billion (2019). The last year was when the two 737-Max airlines crashed.

Therefore, looking at the prior four years (before 2019) shows Boeing has the ability to generate up to $13.6 billion in FCF. With the same assets, the company could produce this in the future. However, higher debt payments and interest expenses now would reduce it.

Therefore, let’s just take an average of those four years. That works out to an earnings power of $9.75 billion in FCF.

Boeing’s True Value

One way to estimate the true value is to use this earnings power in a formula. For example, let’s assume that the market eventually values the $9.75 billion at a yield of 5.0%. That would give Boeing stock a market capitalization of $194.5 billion.

This can be seen by dividing $9.75 billion by 5.0%. The result of that calculation is $194.5 billion.

Compare that to today’s market capitalization of $135.45 billion. It means that Boeing stock is worth 45% more than today. This puts the stock price at a value of $343.03 per share, compared to its Dec. 8 price of $236.57.

Moreover, if the market were to be even more generous, it could give Boeing stock a FCF yield of 3.33%. That would give it a market capitalization of $295.3 billion. This is more than twice the present market cap, up 118%.

The price would then be $515.76 per share, or 118% higher than today.

Therefore, the average of these two valuation targets is $429.40, or 81.5% above today’s price.

What To Do With Boeing Stock

As anyone who reads my articles on InvestorPlace knows by now, I like to put probabilities, or odds, on different target price outcomes. That gives us an “expected return” value for the stock.

So, for example, let’s say that there is a 70% probability the stock reaches the average earnings power target price of $343.03. After all, it seems more probable than not that the company will return to its average earnings power with a reasonable FCF yield of 5.0%.

Let’s also assume that there is a good probability, say 20%, that Boeing stock could even attain a 3.33% FCF yield, or $515.76 per share.

Lastly, let’s say there is a 10% likelihood the stock stays at the same level over the next year or so, at $236.57.

So here is how we calculate the expected price target with these odds. First, we multiply 70% times $343.03. That gives us a price of $240.12.

Next, we multiply $515.76 times 20%, or $103.15, and add that to $240.12. Now the expected price is $343.27.

Lastly, we multiply $236.57 times 10%, or $23.66, and add that to $343.27. Now the expected price for Boeing stock is $366.93. That is 55.1% above today’s price.

Therefore, we can say that our best estimate for the expected return for Boeing stock is 55.1%. Now if it takes up two years for this to occur, the average annual return is 24.5% for each of the next two years. For most investors that is an acceptable ROI.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Mark Hake runs the Total Yield Value Guide which you can review here.