When investors hear the official rating of Underperform, they are effectively hearing “Sell.” But not all Sell ratings are created equal when it comes to stocks. For Boeing Co. (NYSE: BA), what are investors supposed to think when they hear a Sell rating but a higher price target, higher earnings expectations, higher share buybacks and a migration away from a raw price-to-earnings (P/E) analysis to derive a higher price ahead?

Merrill Lynch’s Ronald Epstein maintained an Underperform rating on Boeing, while lifting the official price objective to $150 from $135. This compares to a previous closing price of $175.96.

24/7 Wall St. reviewed how this stacks up against the Thomson Reuters consensus estimates. Boeing’s consensus analyst price target has been steadily increasing of late to a current target of $176.50. That consensus target price was $173.70 a month ago, and it was $161.70 late in January and $156.50 late in December.

Thomson Reuters shows that there are 11 ratings in the Buy, Outperform and Strong Buy category. That compares with 10 ratings in the Sell and Neutral category and four in the Sell and Underperform category (which includes the Merrill Lynch call).

While Epstein’s call talks of a concern about a slowdown in the aerospace cycle, there are many positives. In fact, some of the areas for earnings growth and share buybacks look aggressive enough that some investors might wonder if this should be viewed as an “upgrade-light” call after the outlook having been negative for some time.

Epstein addressed the aerospace cycle concerns specifically, while also addressing some of the positives:

We view it positively that Boeing has been able to squeeze cash from working capital in the last five consecutive years resulting in free cash flow conversion in excess of 100%. However, we continue to believe that this may be the early stages of a commercial aerospace downcycle. In 2016, aircraft order deferrals and cancellations accelerated. Demand in the widebody jet market continues to decline and the 777 remains vulnerable. The narrowbody jet market seems stable, but is showing some softness. Continued strength in the 737 through the decade could help bridge the 777 to the 777X on cash generation, but we remain cautious.

Epstein raised Boeing’s earnings per share (EPS) estimates on a lower share count and from the pension tailwind as decreasing pension expenses will boost segment margins. This is after Boeing repurchased $7.0 billion in shares in 2016 and $6.8 billion in 2015. That makes for a lowering of its diluted shares outstanding by 8% in 2016 and 6% in 2015.

For 2017, Merrill Lynch increased its expected buyback assumptions to $7.0 billion (up from $6.0 billion) and for 2018 they boosted the buyback expectations to $7.5 billion (from $4.0 billion). For 2019, the firm increased its buyback assumptions to $5.0 billion (from $3.0 billion) and in 2020 and 2021 they raised their share buyback assumptions to $4.0 billion (from $2.0 billion) in each year. The core EPS estimates were raised as a result as follows:

• To $9.30 from $9.20 in 2017
• To $9.00 from $8.30 in 2018
• To $9.65 from $8.80 in 2019
• Go $11.50 from $10.30 in 2020
• To $12.50 from $10.90 in 2021

While the outlying annual EPS assumptions were raised, Merrill Lynch tweaked its quarterly estimates to reflect a lower first quarter due to unfavorable timing of expenses and sales-mix after management guidance (lowered to $1.84 from $2.17). For the rest of 2017, Merrill Lynch raised its EPS estimates as follows:

• Second quarter to $2.43 from $2.27
• Third quarter to $2.46 from $2.39
• Fourth quarter to $2.59 from $2.37

As far as why the price target was hiked to $150 from $135, Epstein noted that the firm is changing its valuation methodology to cash flow versus earnings (P/E multiple to P/FCF). He said:

In our view, a free cash flow multiple better reflects the current stage of the aircraft order cycle and excludes non-cash effects of program accounting. We derive our PO of $150 using a 0.7x P/FCF multiple relative to the S&P 500 on 2018 estimates, in line with historical averages. We may see upside to Boeing’s multiple if the market multiple continues to expand. However, Boeing has traded as low as 0.3x during previous aerospace order downcycles.

For additional concerns in the investment rational: Epstein expects the stock to be pressured in the medium-term as Boeing grapples with industry concerns regarding overproduction, as well as development and production risks on programs like the 787, 777X and 737MAX.

Despite stocks having been lower on Tuesday and Wednesday morning, Boeing’s stock price was last seen up by $0.24 at $176.20, in a 52-week range of $122.35 to $185.71.

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