Boeing Co: Job Cuts Don’t Change a Thing for BA

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The market’s early vote on Boeing Co (BA) shedding jobs was atypical and only served to make shareholders in Boeing stock more nervous. My advice to anyone with equity in Boeing? Chill out.

Boeing Stock: Job Cuts Don’t Change a Thing for BAAs perverse as it may seem, the market usually loves it when a company pares its labor force. That’s because labor is usually a company’s single largest cost, and lower costs mean higher earnings per share.

BA, however, fell in morning trading Wednesday, suggesting that the market interpreted the move as a reaction to hearty competition from Airbus.

There are reasons for concern. Airbus has beaten Boeing for two years in a row when it comes to backlog. The European maker of jets and defense systems ended 2015 with a backlog of 6,774 aircraft vs. 5,795 for Boeing. Airbus also sold more planes last year, with orders of 1,080 to 878 for Boeing.

Airbus is getting a lift on the strong dollar, while Boeing is being crushed under it, and Airbus has also seen strong demand for its A321neo jetliner.

And let’s not forget that Boeing is also military contractor in an age of constrained government spending.

Here’s the kicker: While Boeing had record revenue in 2015, adjusted EPS actually declined despite a $12 billion — now $14 billion — share repurchase program. So Boeing chose to respond with job cuts.

Boeing is paring its workforce by 4,000 in its commercial airplanes division, and another 550 in its flight test segment. Boeing softened the blow by emphasizing that 1,600 jobs will be vacated through voluntary buyouts, while the remainder of the cuts will come from leaving open positions unfilled.

Don’t Sweat Boeing Stock

What’s important for anyone holding Boeing stock to remember is that the market should neither be surprised nor concerned by this move.

This is the fourth straight year that Boeing has shrunk its workforce. The market already knew that Boeing issued a disappointing 2016 forecast featuring a drop in deliveries and weak earnings. It’s not like management made any secret of its cost-cutting plans. Indeed, CEO of Commercial Airplanes Ray Conner made it clear last month that more job cuts were coming.

In other words, any concerns over BA should have been reflected in the share price by now. Boeing stock fell by as much as 1.4% Wednesday morning in an up market. That’s not an alarming move but it is significant for a component of the Dow Jones Industrial Average.

The bottom line is that this news no way changes the investment thesis on Boeing stock. The market expects EPS growth of 10% and 11% for the next two fiscal years. The valuation on Boeing stock is a fair reflection of that forecast. With a forward price-to-earnings ratio of 13, you could even say it’s cheap by today’s market standards.

Boeing stock hasn’t really gone anywhere in two years, so it’s understandable if shareholders are frustrated. But that doesn’t make it a sell.

It will probably take a good while longer for BA to turn things around, but patient investors will be rewarded.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/03/boeing-stock-ba/.

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