Why the Boeing Co (BA) Stock Rally Should Be Out of Gas

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Shares of Boeing Co (NYSE:BA) have had an impressive run of late. BA stock has increased over 30% in just 5 months, a run that has significantly outpaced other defense stocks over that period. While there has been some good news of late — including higher expectations for overall growth since the election — there also have been several developments that have raised questions about the future of Boeing stock.

Why the Boeing Co (BA) Stock Rally Should Be Out of Gas

Competition is tough and it’s getting tougher. Orders have slowed, with output of the 777 being cut ahead of the release of the 777x. Earnings growth has been impressive, but beyond 2017, that growth may get more difficult for BA stock.

Boeing stock hardly is expensive, to be sure. BA trades at 18x the midpoint of 2017 earnings guidance — and closer to 13x the company’s anticipated free cash flow. Meanwhile, Boeing continues to outpace rival Airbus Group SE (OTCMKTS:EADSY) in orders and deliveries. But more competition is coming, and external and political pressures could rattle Boeing stock over the next few quarters.

Why Boeing Stock Could Hit Some Turbulence

The biggest near-term question for BA stock is whether it has simply flown too far, too fast. Boeing shares have more than quadrupled over the last eight years. Over that period, BA has outperformed other major defense stocks, including Airbus, Lockheed Martin Corporation (NYSE:LMT), United Technologies Corporation (NYSE:UTX) and Raytheon Company (NYSE:RTN). The run includes 17% gains since the election, better performance than all peers but General Dynamics Corporation (NYSE:GD).

To be sure, Boeing has performed well since the financial crisis: 2010 Core (i.e., non-GAAP) earnings-per-share was $4.45; the midpoint of 2017 guidance is for $9.20 per share. At that level, BA would more than double EPS in seven years — an average growth rate of 11%.

The problem is that BA should be growing earnings in an improving global economy. While the company is considered a defense stock as well, only ~30% of sales come from its Defense, Space & Security segment. Two-thirds of revenue come from commercial airplanes. And in that business, there’s reason to expect a slowdown in growth as soon as the second half of this year. 2016 orders were at the company’s lowest level since 2010. “Book to bill” — the ratio of orders to shipments — hasn’t been this low since 2004.

In the near-term, there’s a possibility that the sentiment could reverse toward Boeing stock simply due to valuation and growth stocks. And there are some catalysts on the horizon that could bring those concerns to the forefront.

Longer-Term Questions for BA Stock

Boeing already has seen first-hand the potential for politics having an impact on defense stocks. A simple Tweet from then-President-elect Trump in December that criticized the cost of the Boeing-made Air Force One led BA stock down over a percentage point. A month later, another Tweet criticizing Lockheed’s F-35 — and raising the possibility of a replacement with Boeing’s F-18 Super Hornet — sent LMT stock down, and Boeing stock up.

Twitter aside, there are political concerns here. Trump’s politics could jeopardize as much as $20 billion in commercial aircraft orders in the Middle East, according to a January report from CFRA Research. A “trade war” driven by a border tax similarly could more broadly pressure BA’s international revenue.

That would be a big problem for Boeing stock. On average, roughly 59% of BA’s total revenue has come from overseas over the last three years. Frustration with U.S. policies could give a leg up to Airbus in commercial aircraft procurement. Meanwhile, new firms wait in the wings. Russia’s Irkut Corporation (OTCMKTS:IRKTY) and China’ state-owned Commercial Aircraft Corporation of China (known as Comac) both are taking aim at the global aerospace market.

Comac’s C919 has been delayed, missing its goal of first flight by three years. But it has a strong chance of winning in the domestic market in China — a key market for Boeing. In fact, 11% of 2016 revenue came from that country, according to BA’s annual report. And Airbus wrote in its 2015 annual report that China would be the top market for deliveries over the next twenty years. It’s a key market for Boeing — and one where aggressive U.S. trade policy could backfire.

Bottom Line on Boeing Stock

This isn’t to say that BA stock necessarily is a sell at the moment. Boeing is the preeminent aircraft manufacturer in the world, growth isn’t ending yet, and earnings and cash flow multiples look modest. A 3.4% dividend yield adds income for BA stock investors as well.

But price matters, too, and there are near-term concerns that could send Boeing stock lower. Looking out further, political and competitive pressures could be potential problems. BA stock may not be set up to collapse, but there are reasons to think that the price could get lower in the near-term. After a quick 30% rally, it looks like it’s time to take profits.

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

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2017/02/boeing-co-ba-stock-rally-out-of-gas/.

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