Boeing (BA:NYSE) Stock: A Strong Buy as Aviation Industry Forecasts $8 Trillion Growth

Boeing, one of the world's leading aircraft manufacturers, recently announced that it expects to spend a staggering $8 trillion on commercial aircraft between 2023 and 2042. This massive investment demonstrates that the demand for airplanes is not a problem for Boeing or its rival Airbus. Instead, both companies will need to focus on increasing production to meet this demand.

The updated market forecast from Boeing, released ahead of the company's biennial air show in Paris, reveals a significant increase in cumulative spending compared to the previous forecast. Last year, Boeing projected that cumulative spending on commercial aircraft between 2022 and 2041 would amount to $7.2 billion, excluding Russia and Central Asia. The new figure of $8 trillion represents the need for approximately 42,600 new planes by 2042. This substantial number of aircraft will expand the global fleet of commercial passenger and cargo planes from around 24,500 today to 48,600, taking into account the retirement of older or more costly planes.

Several factors contribute to the growing demand for a larger fleet of aircraft. Global population growth, coupled with an increasing number of individuals who can afford air travel for leisure and business purposes, is driving the need for more planes. Boeing predicts that by 2042, the number of households worldwide with an annual income of over $25,000 will reach 1.3 billion, up from approximately 800 million today. However, meeting the $8 trillion expenditure won't be a walk in the park. Boeing and Airbus would need to produce an average of 2,000 planes per year for a period of 20 years. Even if China's state-owned airline, COMAC, captures a significant portion of the Chinese market, Boeing and Airbus would still have to supply around 1,900 planes per year on average for two decades.

Unfortunately, the aviation industry faced a setback due to the COVID-19 pandemic, which led to a halt in growth for more than two years. In recent months, Boeing, along with key suppliers like General Electric, has highlighted the need to rebuild the supply chain to support such massive production on an annual basis.

Boeing's positive growth outlook is encouraging news for the commercial aviation industry as a whole. While global domestic flights have only recently surpassed pre-pandemic levels, international flights remain around 16% below previous levels. However, the recovery has instilled confidence in investors, resulting in a significant increase in Boeing and Airbus shares. Over the past 12 months, Boeing shares have risen by about 61%, while Airbus shares have seen a 39% increase, compared to a 20% rise in the S&P 500.

The upcoming air show in Paris, which begins tomorrow, is expected to attract significant attention from investors. They eagerly anticipate updates on supply chain issues and sustainability efforts. The air show, lasting until June 25, historically has had a positive impact on aircraft manufacturers' stock prices. Since 1997, Boeing shares have seen an average increase of 5.6% in the month preceding and following the show.

Over the years, Boeing has made significant headlines with its innovative aircraft concepts, such as the supersonic plane proposed by Ben Hir in 2001, although it never became a commercial reality. In 2005, Airbus introduced the A380, while Boeing unveiled the 787 Dreamliner in 2007. Despite their different sizes, the 787 outperformed the A380 in the market, offering lower costs and enabling more long-haul direct routes.

This year, the focus at the air show will primarily be on sustainability and the use of sustainable aviation fuel (SAF). GE recently conducted a survey among decision makers in the aviation industry, with 30% of respondents identifying sustainability as the most important issue facing the industry today. Supply chain problems ranked as the second most important issue, according to 19% of respondents.

Boeing's predictions for the next two decades estimate that airlines worldwide will add 42,595 jets valued at approximately $8 trillion. Climate change concerns are expected to influence consumer travel behavior, with a potential decline in shorter commercial flights of fewer than 500 miles as governments encourage greener alternatives like trains.

Airlines' ability to maximize the productivity and profitability of their aircraft will also impact sales. Boeing forecasts that carriers will find ways to increase productivity by about 20% through strategies such as utilizing larger planes, implementing denser seating configurations, and keeping aircraft in the air for more hours per day.

Boeing's growth projections suggest that the global fleet will nearly double by 2042, expanding at a faster pace of 3.5% per year compared to the forecasted annual global economic growth rate of 2.6%. Airbus predicts the commercial market will see the entry of 40,850 new jets during that period. Both manufacturers anticipate that single-aisle jets, like Boeing's 737 Max and Airbus's A320neo, will dominate the market, accounting for 76% and 80% of projected sales, respectively.

Boeing acknowledges that not every category of aircraft will experience robust growth. The company has reduced its expectations for the number of air freighters and regional jets entering the market, reflecting a 1.6% and 14.6% decrease, respectively, from last year's forecast.

Boeing's CEO, Stan Deal, anticipates increasing production of the company's best-selling 737 Max to 38 jets per month in the near future. However, he also warns of ongoing supply chain challenges and the discovery of new issues that may affect stability. Deal emphasizes the significant impact of the COVID-19 pandemic on labor availability and the industry's reliance on skilled workers for operational efficiency.

To address these challenges, Boeing has initiated a supply chain quality review, involving CEOs, C-suite officials, and quality and engineering representatives from tier-one supply chain partners responsible for major aero-structures and sub-assemblies.

The Paris Air Show holds great importance for the aviation industry, especially after the turbulence caused by the COVID-19 pandemic. The event provides an opportunity for companies to showcase new technologies, commercial and military aircraft, and establish business agreements. With airlines experiencing a surge in travel demand and a desperate need for new jets, the air show could play a pivotal role in shaping the future of aircraft manufacturing.

Looking at Boeing's order and delivery numbers, May saw a significant increase in orders compared to the previous month. The company received 69 gross orders, a rise of 35 orders. Of these, 86% were for single-aisle jets, while wide-body airplanes accounted for the remaining 14%. Notable orders included two Boeing 787-8s from Air Niugini and 59 Boeing 737 Max planes from unidentified customers. Boeing also made several adjustments to its order book, including cancellations and order transfers.

In terms of deliveries, Boeing delivered 50 jets in May, up from 26 in the previous month. This included 36 Boeing 737 planes, 14 wide-body aircraft, and a mix of models such as the Boeing 767-300F, Boeing 777F, and Boeing 787. The total value of these deliveries amounted to $3.8 billion. May's delivery numbers showed a 15-unit increase compared to the same period last year.

While Boeing's stock price has seen significant growth over the past year, outperforming the broader market, some analysts believe it may have surpassed its current fundamentals. However, the company's long-term prospects remain promising. Boeing has a backlog of over 5,000 aircraft valued at nearly $400 billion, and its net orders have increased tenfold compared to pre-crisis levels. With plans to increase production rates and improve cash flow, Boeing aims to reduce debt, cut interest costs, and open a fourth production line for the Boeing 737 Max.

Investors should be cautious about short-term fluctuations in Boeing's stock price, but the long-term outlook appears positive and marked as a Strong Buy Stock. While challenges persist, the overall trends and prospects in the industry are favorable. Valuing Boeing at 16 to 17 times its projected free cash flow generation, a price target of $265 to $280 could be achievable in the mid-decade. The stock may offer around 30% upside as it executes on its targets and demonstrates positive momentum.

In summary, Boeing's forecasted $8 trillion expenditure on commercial aircraft highlights the strong demand in the industry. The company, along with its competitors, must focus on increasing production to meet this demand. The Paris Air Show holds significant importance for the aviation industry, offering a platform to address supply chain issues and showcase sustainability efforts. Despite short-term challenges, Boeing's long-term prospects, including a substantial backlog and expected growth in free cash flow, make it an attractive investment opportunity for the future.