Should I Buy Or Sell Boeing Co (BA) Stock? 3 Pros, 3 Cons

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Boeing Co (BA), along with Airbus, continues to control the international passenger jet market. Duopolies make for great businesses, and Boeing is no exception. It has a fantastic brand, excellent new fuel-saving designs, and is riding a long wave of emerging market demand for its product as international passenger travel soars. And a Happy Birthday is in order, Boeing turns 100 this year.

Boeing logo

But the past year has been difficult for BA stock. The strong US dollar has more and more airline customers turning to comparatively cheaper Airbus planes. Following earnings last week, the BA stock price got clipped, falling to new 52-week lows. Is it time to buy or sell Boeing shares? Here’s three pros and three cons.

BA Stock Pros

International Air Travel Continues To Boom: The International Air Transport Association (IATA) estimates that air travel will double between now and 2034. This amounts to a 3.8% compound annual growth rate, well above international GDP growth or international population growth. There are currently around 3.5 billion air travelers per year, this should reach 7 billion over the next 15-18 years.

That’s good news for Boeing stock over the long-term.

The fastest growth will come in areas that are less well-serviced by air transportation now. Namely, Africa, parts of Asia such as India, and South America. This should offer substantial opportunities for Boeing to find new markets.

Boeing Has A Strong Defense Arm: BA is more than just a commercial company. It also has a large defense arm making a diverse range of products for the US and other militaries. Among them, the Apache helicopter, the B-52 bomber, the Chinook helicopter, the F-18 Super Hornet, and various weapons.

It also just secured a new contract for the renewing of the Air Force One presidential aircraft unit. While this isn’t a big dollar contract, it’s hard to imagine a more prestigious contract win than the President’s mobile office. Also of note, the potential election of a Republican in 2016 could free up more money for the Defense Department. All positives for the BA stock price.

High Dividend Yield: There’s more to a company than just making great products. Potential shareholders have to ask if the company is treating them well. In Boeing’s case, the answer is a clear yes. BA stock currently pays a 3.6% yield, which is very high among Dow Jones index companies.

The company has quadrupled the dividend over the past 11 years, and just gave BA stock holders another 20% raise in 2015. With trailing earnings of $7.44/share, they can still cover the $4.36/share dividend with plenty of room to spare.

Those are the pros…but what about the cons?

BA Stock Cons

Poor Quarterly Earnings: Boeing stock got hit for a roughly 10% drop the other day following negative earnings. Core earnings were only $1.60 for the quarter, well down from last year’s $2.31. Commercial aircraft revenues were down 7%, and network and space solutions off 10%, more than offsetting gains from military aircraft and global services and support.

That’s not all. Boeing also put out really disappointing guidance for 2016. Core EPS for this year is now guided to $8.15-$8.35 versus analyst consensus of more than $9 previously. They also cut revenue guidance. Analysts have been pounding the company due to the weak earnings. Goldman Sachs, Deutsche, Credit Suisse, JP Morgan, and Jeffries all cut price targets in the past week.

Strong US Dollar: The strong US dollar continues to hurt BA stock, as it has been doing to many US-based multinationals. Boeing is cutting production run rates on several of its product lines, including the venerable 747. It is struggling due to several reasons, but they all tie back to the strong dollar. Cargo shipment volumes are down, presumably because the emerging markets are struggling. That hurts demand for the gigantic 747 models.

And Airbus is picking up more and more of the new orders. Look at even a country like Iran, which is in the US’ debt after the lifting of sanctions, still going with Airbus instead of the American option. BA is now forecasting only 740-745 commercial aircraft deliveries in 2016. This is by no means a disaster, but it is down sequentially from the 762 that Boeing delivered last year.

Low Price of Oil: You might think that the low price of oil would be a tailwind for BA stock. You would think, “Oh, since oil is cheaper, airlines save money, so they can charge lower fares, attract more passengers and have higher profit margins with which to buy or lease new planes.” That would be logical, but it isn’t actually how things play out.

You see, Boeing’s main appeal to airlines is fuel savings. With each new generation of planes, Boeing can dramatically cut fuel consumption of a plane by using more efficient engines, lighter composite building materials, and other such advances. An airline flying a 15 or 20 year old airplane might be tempted to upgrade anyway to appeal to passengers.

However, if the price of jet fuel is high, and Boeing is telling you that you can cut your fuel usage by 20% when you upgrade to the latest model, that substantially improves the economics of your business. However, if the price of fuel is low and oil only is a small part of your budget, there is little motivation to upgrade merely to save fuel. As long as oil stays at these low prices, airlines will keep letting their fleets age, rather than upgrading for newer more efficient models.

Verdict

BA stock is a great thing to hold. Any company that can survive 100 years and still lead its industry is doing a pretty good job. It pays a fantastic yield, and with the recent sell-off is now selling at an acceptable valuation.

The downsides are substantial, but nothing that would strike me as a permanent problem. The dollar goes up and down, as does the price of oil. And no one earnings report will ever make or break a company. I don’t own any BA stock yet, but I’m watching closely for a buy here.

At the time of this writing, the author had no position in Boeing shares. You can reach him on Twitter at @irbezek.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2016/02/buy-sell-boeing-ba-stock-3-pros-3-cons/.

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