Boeing Co (BA) stock slumped on Wednesday after a trenchant note from Bank of America Corp analyst Ron Epstein, who downgraded shares from a “neutral” to an “underperform” rating. Central to his thesis? The airplane manufacturer’s long-term profit goals are fundamentally unachievable.
That’s quite the assertion, and one that Boeing execs may have to address directly on the earnings conference call April 27.
BA stock is now off about 9.2% on the year after the post-downgrade stumble, underperforming the 3% year-to-date return for the S&P 500 by more than 12 percentage points.
Boeing Stock: by the Numbers
Specifically, Epstein sees the 787 program generating far less cash flow than BA projects. While management thinks the delivery of 787s will generate $29 billion in cash by 2022, Epstein thinks the number will be less than half that: $14 billion.
For Boeing to even cover deferred production costs of $28.5 billion by that time, the company will need to make an average of $30 million per plane across the remaining 907 787 deliveries.
That goal is “unachievable” according to Epstein. He thinks a per-unit profit of $16 million is more likely.
BA stock owners have the right to be concerned over these recent projections, especially in light of an ongoing investigation from the Securities and Exchange Commission regarding profit projections related to its Dreamliners and 747s.
While Boeing can keep making moves like the recent decision to cut 4,000 workers by June, job-cutting your way to healthier margins only goes so far. It certainly isn’t a long-term solution for BA stock.
Bottom Line for BA Stock
Boeing shares trade at a reasonable 17.6 times earnings, but its financial situation isn’t the most enticing I’ve ever seen. Analysts expect first-quarter revenue to fall 2.5% year-over-year to $21.59 billion when BA reports later this month. Meanwhile, earnings per share are expected to fall 7.1% to $1.83 from $1.97 in the year-ago period.
So buying BA stock gets you shares in a company that’s declining (however slightly), is under SEC investigation and is doubted by analysts. What could go wrong?
Oh, did I mention competition with Airbus Group (EADSY) and even Embraer SA (ADR) (ERJ) is stiffer than ever? Well it is, and recent years have seen the likes of Lufthansa (DLAKY) and American Airlines Group Inc (AAL) patronize Airbus at Boeing’s expense.
None of this is good news, and in fact there’s not a ton of silver lining to be had.
Buying Boeing stock here is a really difficult proposition, and one I wouldn’t recommend pursuing.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
