JPMorgan unveils its top pick in commercial aerospace: Investors missing a 'sweet spot'

Published Fri, Dec 1 20172:14 PM EST

Wall Street doesn't appreciate Boeing's "production sweet spot," which should carry core earnings per share and free cash flow through 2020, Cowen research said Friday. Earnings per share will pop more than 10 percent while cash flow per share will ramp to $24 over the next three years, according to analyst Cai von Rumohr, who called the aerospace company a top pick. "Boeing's results likely will continue to reflect its very favorable production environment, which is yielding stronger than expected 2017 EPS and cash flow," wrote von Rumohr. "Most investors have missed the power of Boeing's favorable production environment, conditions for which are likely to continue unless the economic upturn unravels or interest rates surge." Boeing – a jewel of the United States economy and a Dow Jones industrial average leader in 2017 – has appreciated more than 75 percent since January. Shares rose 0.3 percent Friday. The analyst based much of his bullish bet on expectations of production expansion, calling output stable and the delivery mix mature. His $320 price target is 16 percent higher than Thursday's closing price. "Based on Boeing Commercial Airplanes' hefty seven-year backlog and indicated production rates, its 2018-20 revenues are likely to increase by close to 4 percent per year vs. average swings of 14 percent in 2005-2015 and 21 percent in 1995-2005," added von Rumohr. "737 MAX has relatively few Boeing-produced changes and appears to be doing well. It's had 34 deliveries year to date, is produced on the same line as the Boeing 737 Next Generation, and has a 2017 delivery target of 53+ planes or 10 percent+ of total 737 deliveries." But production isn't the only area Cowen sees as favorable to Boeing's top line. The analyst cited the pending Republican tax overhaul as potentially beneficial to the airplane manufacturer. Should the GOP succeed in reducing the corporate tax rate to 20 percent as planned, von Rumohr sees an addition $4 per share to projected 2020 cash flow.

Employees on a platform next to a Boeing 737 MAX 9 jetliner at the company's manufacturing facility in Renton, Washington.

David Ryder | Bloomberg | Getty Images

Wall Street doesn't appreciate Boeing's "production sweet spot," which should carry core earnings per share and free cash flow through 2020, Cowen research said Friday.

Earnings per share will pop more than 10 percent while cash flow per share will ramp to $24 over the next three years, according to analyst Cai von Rumohr, who called the aerospace company a top pick.

"Boeing's results likely will continue to reflect its very favorable production environment, which is yielding stronger than expected 2017 EPS and cash flow," wrote von Rumohr. "Most investors have missed the power of Boeing's favorable production environment, conditions for which are likely to continue unless the economic upturn unravels or interest rates surge."