To put it in pilot parlance, Boeing Co (NYSE:BA) has nudged the throttle forward to pick up speed en route to a higher altitude. Specifically, the aircraft maker recently doubled manufacturing capacity for its increasingly popular 737 passenger jet at its Renton, Washington plant.
At first glance it could be concerning to current or would-be owners of BA stock. Not only did President Trump take aim at Boeing over the cost of the next version of Air Force One, he’s effectively put all defense contractors on notice that overpriced wares won’t be tolerated.
Lockheed Martin Corporation (NYSE:LMT) was recently forced to make price concessions on its F-35 fighter jet program. Last week, Boeing dodged a bullet when workers in South Carolina voted against union representation, ending a bitter battle.
CEO Dennis Muilenburg told a Cowen and Co. conference earlier this month that it wasn’t selling enough 777 and 787 jets, adding to the challenges ahead for Boeing stock. Investors may be wondering if it can sell enough of everything else to offset any weakness from those two planes.
If recent orders are any indication, the answer is a strong “probably.” BA stock holders may want to look at a couple of other recent developments which bode very well for the company. They show that Boeing is going to need that new capacity.
Two Tailwinds Blowing
Earlier this month Singapore Airlines (ADR) (OTCMKTS:SINGY) placed an order for 20 777’s and 19 787’s, worth a total of $13.8 billion. No single order — no matter how big or small — can make or break the company, but it’s an encouraging answer to Muilenburg’s worry that Boeing isn’t selling enough of those particular planes.
The kicker: It may have been a bit hyperbolic, though StrategicAero Research chief analyst Saj Ahmad commented following news of the Singapore Airlines order:
“It almost certainly signals the death-knell for the aging and less fuel efficient A380 fleet. There doesn’t seem to be appetite to buy more and add yet more capacity into its network when the entire (Asia-Pacific) region is battling to make money and generate better yields, despite cabins being fuller as a result of cheaper air fares.”
If Airbus does indeed close the books on the A380, it creates an opportunity Boeing in that category.
At the same time, just a month after President Trump gave Boeing some rough treatment, he threw the company a tentative bone. Reversing a stance he voiced on the campaign trail, Trump is now semi-supportive of the United States Export-Import bank.
The bank essentially facilitates international trade of aircraft and other goods by offering loans to buyers and loan guarantees to Boeing’s overseas customers. Trump had threatened to shutter the service but now seems to be willing to back it. Those loans would support BA, including its move to set up a shop in India as the foundation for growth in the region.
Bottom Line for BA Stock
This week, Buckingham Research was chastised for a strange downgrade. While it upped its target price to $140 from $100, it downgraded BA stock to “Underperform.” Even more troubling to investors is that BA shares are now priced above $160.
Beneath the surface, though, Buckingham’s thinking and action does make sense, and prospective BA stock buyers may be best served by waiting for a pullback.
While the stars may be aligning for the company, Boeing stock has rallied a hefty 26% over the course of the past six months, pushing its trailing P/E to a frothy 22.1. Although the future may look brighter, that’s still a tough earnings multiple to justify based on the next few months. As Buckingham voiced it, BA stock is “priced to perfection.”
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
