Shares of Boeing (BA) jumped in morning trading after the stock was upgraded to Overweight at Morgan Stanley and initiated with a Positive rating at Susquehanna. Morgan Stanley analyst Rajeev Lalwani told investors that he is "comfortable" with the Commercial Aerospace cycle alongside the selloff in shares from recent highs, while Susquehanna's Charles Minervino said demands for jets positions Boeing for "visible long-term growth."
BOEING UPGRADE, INITIATION: Morgan Stanley analyst Rajeev Lalwani upgraded shares of Boeing to Overweight from Equal Weight and raised his price target to $450 from $400, telling investors in a research note that he is comfortable with the Commercial Aerospace cycle alongside the selloff in Boeing shares, which are down about 15% from its recent highs. "Barring a downturn, the resilience of the EPS and FCF profile should remain in place within Commercial Aerospace, which is supported by airline profits and air traffic holding steady following the decline in oil," the analyst contended. In addition, Lalwani added that he sees compounding growth coming from buybacks, production hikes and margin improvement of 15%-20%, "all from a management that has proven to be best-in-class." Susquehanna analyst Charles Minervino initiated coverage of Boeing with a Positive rating and $388 price target, telling investors in a research note of his own that he believes the commercial airplane market is still in an order upcycle. The analyst said customers need to replace aging fleets while catering to growing travel demand and the recent pullback in the stock makes the shares attractive. Jefferies analyst Shiela Kayaoglu said on Wednesday that Boeing remains one of her top picks with rising deliveries and productivity leading to 16% annual earnings growth through 2021. The company's focus on productivity should translate to superior free cash flow, which is undervalued at current share levels, Kahyaoglu said. However, she believes headwinds from the 777X build and taxes could lead to more moderate 2019 free cash flow growth. Nonetheless, Kahyaoglu, who has a Buy rating and $394 price target on Boeing shares, expects free cash flow per share to climb to $30 in 2020, representing a 9% yield.
LOCKHEED DOWNGRADE: While upgrading Boeing, Morgan Stanley's Lalwani downgraded Lockheed Martin (LMT) to Equal Weight from Overweight and lowered his price target to $300 from $366, telling investors in his research note that he sees emerging headwinds on earnings and cash flow post-2020 with the F-35 plateauing and pension tailwinds receding. The analyst said he remains "positive" on United Technologies (UTX) and Spirit AeroSystems (SPR) given potentially strategic optionality and break-up value and an increased free cash flow outlook, respectively. His top pick in the defense sector remains Raytheon (RTN) given balance sheet optionality, "leading" margins and thematic exposures. Though Lalwani turned bearish on Lockheed, Susquehanna's Minervino initiated shares with a Positive rating and $321 price target, saying he believes the company should be a prime beneficiary of strong global defense spending. He expects its earnings growth will drive free cash flow generation in the coming years, providing opportunities for additional dividend increases, debt reduction, share repurchases and potential acquisitions. Lockheed shares were also upgraded to Buy from Hold at Vertical Group.
WHAT'S NOTABLE: Boeing on Tuesday said it delivered 806 jets for 2018, falling shy of the 810-815 jets it had looked to deliver. The company's output has been slowed since last summer by shortages of fuselages, engines and other parts. "Boeing raised the bar again in 2018 thanks to our teammates' incredible focus on meeting customer commitments, and continuously improving quality and productivity," said Boeing Commercial Airplanes President & CEO Kevin McAllister. "In a dynamic year, our production discipline and our supplier partners helped us build and deliver more airplanes than ever before to satisfy the strong demand for air travel across the globe."
PRICE ACTION: In morning trading, shares of Boeing are fractionally higher to $344.82, while Lockheed Martin is up 0.8% to $272.81.