If you bought Boeing (BA) stock at the beginning of the year and weathered the turbulence of the four-month grounding of the company’s 787 Dreamliner, hefty sequestration cuts and the partial federal government shutdown, pat yourself on the back. Your tenacity has paid off, to the tune of a 78% return.
In a week that saw BA book more than $100 billion in commercial aircraft orders at the Dubai Air Show, it seems logical to let that money ride a little longer. Then again, now might be a great time to take those winnings and walk away from Boeing stock.
The undisputed winner at this week’s Dubai Air Show, Boeing took orders for 342 aircraft — at a list price of $101.5 billion — more than double European rival Airbus’ (EADSY) $44 billion, 160-plane order book. Of particular note: Boeing officially launched its new, composite-wing 777X at the show with 242 orders and commitments.
But great news has a short shelf life. Boeing stock slipped by 3.3% on Wednesday after Oppenheimer Analyst Yair Rainer downgraded the stock from “Outperform” to “Market Perform,” removing the $140 price target, which “has been substantially achieved”. Rainer’s primary concern revolved around free cash flow (FCF) improvement: While investment in the 787 Dreamliner should top out in 2015, that’s about the same time BA will be investing heavily in new aircraft programs like the 777X and the 737MAX.
That new investment coincides with the projected drop in cash contributions from big money commercial aircraft and defense/aerospace programs in 2016. Key programs like Boeing’s current model 777 — as well as defense programs like the C-17 Globemaster III, the F/A-18 Hornet fighter, and the V-22 Osprey tilt-rotor aircraft, which it builds with Bell Helicopter — are fueling FCF growth now, but will taper off.
“We believe investors are overlooking how a convergence of factors are aligning to make 2015 a medium-term peak,” Reiner said. FCF has been a strong value proposition for Boeing stock — allowing BA to roll with a lot of punches including defense cuts and the now-notorious teething troubles of its flagship 787 Dreamliner.
Here are three reasons Boeing stock might have reached its peak:
Hedge Funds Are Bailing Out
Big moves by big money hedge funds are always worth examining. While Boeing’s 787 Dreamliner was grounded earlier this year, the top 50 hedge funds doubled their BA holdings — sinking a whopping $1.6 billion into the stock during the first quarter. That sentiment turned bearish on BA in the third quarter, however, when the hedge funds dumped $1.3 billion in Boeing shares, according to FactSet.