Analysis: BA UAL

In what has been a very strong day for the broader markets, Boeing (BA) is leading is the Dow off a pair of key developments that bode well for the aircraft manufacturer.

First up, analysts at Morgan Stanley increased their BA price target to $250 from $230 on higher free cash flow per share expectations. The analysts revised their forecasts based on their expectation of fewer 737 MAX concessions in 2025 than what they previously estimated and also a slightly higher program margin.

One big reason why Morgan Stanley became more bullish on 737 MAX deliveries is the price of oil. One major draw of Boeing's 737 MAX is its fuel-efficiency, and Morgan Stanley believes the jets have become much more attractive for new orders with WTI at $60 per barrel. And with interest rates still near historical lows, Morgan Stanley estimated that the fuel savings realized by upgrading to a 737 MAX exceed the cost of capital to finance the purchase.

"At $60 oil and a cheap cost of capital of 7% lease yield (annual aircraft rent divided by book value of the aircraft), we estimate that airlines could save $220k (737 MAX vs. 737 NG)... this means that buying a new aircraft is economically advantageous again compared to 2020 when oil hovered around $40 during the summer," Morgan Stanley said in a research note.

Finding sustainable ways to increase profitability is going to be everything for the airlines as they emerge from the pandemic and as air traffic begins to normalize. If there is an economic merit to upgrading aging fleets to more fuel-efficient models, it will likely be taken or strongly considered at a minimum.

Fuel efficiency is one thing. Adding capacity to meet what is expected to be a surge in air travel over the next few years is another. The latter is what likely played a role in United Airlines' (UAL) decision to buy 25 additional Boeing 737 MAX jets for delivery in 2023.

"As we plan for the future and the return of demand, we've been looking at ways to best position our fleet for the recovery and be in a position to best take advantage of people's desire to travel," United Airlines Chief Commercial Officer Andrew Nocella said in a note to staff, according to CNBC here.  

This new order brings the airline's total commitment to the MAX to 188, according to a company filing. In addition to the new purchase, United said it will move up the delivery date on 40 737 MAX jets to 2022 and five jets to 2023.

As we have written about before (like in our Alert here), Boeing is more of a free cash flow story than an earnings story. What will drive free cash flow estimates higher with added visibility is deliver expectations, and delivery expectations increase as more orders come in. That's why the news from United Airlines is so significant, even as the new order is for 2023.

The combination of Morgan Stanley's price target increase and the United Airlines news supports our thesis in Boeing and the stock remains one of our favorite reopening trades. Shares were up nearly 6% at the time this was written and we reiterate our ONE rating on this aerospace company.