Boeing Co. (BA) reported both annual and fourth-quarter earnings, beating estimates with core earnings per share of $1.60 on revenues of $23.57 billion. Still, that doesn’t explain the brutal nose dive Boeing stock took Wednesday morning.
The panic behind the selloff was due to Boeing lowering its forward guidance for 2016. BA expects a decline in commercial airplane delivery, marking the first decline in more than three years.
For investors sitting in the cockpit, that’s the equivalent of losing an engine.
There is simply not enough power to climb, which begs the question: Are we facing a crash in The Boeing Company stock price? Or is this just a bit of turbulence that will take us to a temporary low?
Boeing Stock Weakness Across the Board
Boeing prides itself on a rather mixed portfolio of airplanes and jets that allows it to perform well. That variety ranges from military jets to commercial planes to aerospace equipment. Yet, the latest guidance to come out of Boeing’s earnings report reveals that the company expects weakness across the board.
Weakened Commercial Aircraft Demand: Deliveries of commercial aircrafts are expected to fall in 2016 to 745 from 762. This follows a steady rise in commercial aircraft delivery from 2012. The decline is largely due to overall weak demand for the 747 aircraft. Of course, that is simply a byproduct of a weak cargo sector for which Boeing stock is already paying dearly. The cargo sector has slashed roughly $570 million from Boeing’s Q4 core earnings. Moreover, the orders backlog, an important indicator of demand for new planes, has fallen to $489 billion from $502 billion in 2014. On a positive note, demand for the 737-Max seems strong; currently there are orders for 3000 units in backlog. Even so, that demand is just not enough to counter weakness in the other segments.
Lower Defense, Space & Security Revenues: You’d think that the military aircraft business would be booming given the current geopolitical tensions, but that hasn’t been the case. Boeing stock’s forward guidance on the Defense, Space and Security segment has been lowered to revenues of $28.5 to 29.5 billion in 2016 compared to $30.4 billion. Since revenues for this segment already fell by 2% year-over-year in 2015, that’s clearly troubling news.
Crash or Turbulence?
There is one wild card, however, that might benefit Boeing stock. That is the latest news of Iran’s plans to make a mega purchase of roughly 500 commercial planes for its national airline. If Boeing is able to take a significant bite of that action, that could be a game changer.
But unless that scenario is fulfilled, one must face the hard truth: BA has no rabbit to pull out of its hat. The massive increase in airplane deliveries seems to have topped out pretty much across the board. That is more of a global issue within the aviation sector than a Boeing-specific issue. Given that, the turnaround for BA will be slow.
That is further emphasized when we examine Boeing’s earnings history compared with analysts’ expectations. If we look at the Financial Times survey from a few years back we can see an obvious pattern.
While BA tends to beat estimates, it always does so with a thin margin. That’s a clear sign that Boeing stock, in general, rarely overwhelms investors. It doesn’t seem to matter if the results beat expectations on the way up or the way down.
Since that is the case, it appears unlikely that BA will surprise us with any sudden jump in revenue. Given that, Boeing stock valuation must move to a lower multiple accordingly. Boeing’s growth engine simply can’t carry the stock at these highs.
Since that is the case, Boeing is facing far worse than merely turbulence.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.
