Despite Headline Risk We Still See Value in Boeing

In our most recent note, we stated that we would revise our

The reduction in our fair value estimate stems from increasing competitive pressure, underscored by the cost-cutting announcement this week, ongoing production pressure on certain programs, and an outside risk of an earnings restatement connected to the reported SEC probe. While a restatement would have no immediate cash impact, it would imply lower future cash flows and erode confidence. Boeing has used program accounting for decades, and its independent auditors review it regularly, suggesting that the SEC could very well find nothing material and drop the case. Accounting aside, we are growing more concerned that Boeing is facing stiff competitive pressure, particularly in higher-end narrow bodies. As we have outlined before, the 777 may see further rate cuts.

Nonetheless, conservative assumptions for growth, margins, and cash flow lead us to conclude that the sell-off is overdone. We model no growth in the defense business over our explicit forecast, and midcycle monthly production rates for the 737 and 777 are 56 and 6.5 per month, respectively. Midcycle operating margins in our model are 9%--basically flat compared with 2016. We also believe that our assumptions for deferred production and inventory burn down are conservative, bolstering the case for cash flow. We have modeled a midcycle level of 175 days of inventory and deferred production outstanding, versus a historical average of 148 days, and 210 days in 2015.

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