What do you say about a stock like Boeing (BA) which has soared to record heights and delivered a one-year return of 75%? Savor that gourmet meal in first class, but buckle up in case of turbulence.
Boeing (BA) shares have outperformed even the highest hopes in 2013, soaring 75% in the past year.
This defense/aerospace giant has flown through a series of storms that would have crashed lesser companies: chopped defense budgets with a side of sequestration, a record four-month long grounding of its flagship 787 Dreamliner and increased competition from its European rival Airbus (EADSY).
But while Boeing has weathered those storms with apparent ease, investors should remember the time-tested adage: “Past performance is no guarantee of future returns”. And from that perspective, now’s a good time to be cautious.
Here are three signs Boeing could be headed into turbulence now:
Inexplicably Losing the South Korea Fighter Jet Deal
South Korea rejected Boeing’s bid for an estimated $7.7 billion contract to build 60 fighter jets on Tuesday, shocking the markets. The move even surprised BA, which had been the sole remaining bidder after Lockheed Martin’s (LMT) F-35 and Eurofighter’s Typhoon came in over budget.
South Korean military leaders nixed Boeing’s bid for F15s, noting that even with the upgrades, the F-15 did not meet their needs. They noted that South Korea needed a true “fifth-generation fighter” with advanced capabilities, particularly in light of the threat posed by North Korea’s nuclear weapons capability. Now, BA’s hopes of extending F-15 production until 2020 are greatly diminished — and LMT’s F-35 is back in the hunt, too.
The bigger issue, however, is that any lost international defense business is bad news for BA — international sales account for 30% of the company’s defense revenue.
Airlines Are Losing Patience With Dreamliner Glitches
Boeing’s first variant on its Dreamliner — the larger 787-9 — might have flown a trouble-free maiden flight last week, but the “teething troubles” keep coming for the 787-8s currently in service. Norwegian Air Shuttle summoned BA’s senior management to Oslo on Wednesday to explain glitches with its two new Dreamliners.
The airline grounded one of its 787s last week because of problems with the cockpit oxygen supply; another Dreamliner had to leave behind 70 ticketed passengers in New York because a hydraulic pump problem caused a weight limitation. What makes these glitches different from other “teething problems”? In a break with the typical airline-manufacturer code of silence, Norwegian Air has taken the fight public. “We have not had the reliability that we had expected from brand new planes, so something must happen, fast,” company officials said last week. “Clearly Boeing has not had good enough operative quality control.”
Those are code phrases for serious compensation — a tactic that if successful, will have other 787 operators lining up to imitate. It also could steal the thunder of the new 787-9 and raise questions about how realistic production targets are for BA’s jets — including major new launches like the 737 MAX and the 777X.
Airbus Sales Are Soaring in Asia
If Airbus had deliberately wanted to pour salt into Boeing’s wounds, it couldn’t have picked a better time to announce $15 billion worth of aircraft orders to Asian carriers.
On Wednesday, Airbus announced several deals including a $6 billion, 70-plane order from companies in China alone . The lion’s share of the orders were for A320 series narrow-body aircraft — which will include the A320neo, Airbus’ fuel-efficient workhorse jet that directly competes with BA’s 737 MAX.
These deals are particularly significant because Asia is the fastest-growing air travel market, and existing and start-up carriers will need to buy tens of thousands of new aircraft in the coming two decades.
Let’s be clear: Boeing is not poised on a precipice. Its fundamentals are strong, and there’s a lot to like about the way the company has thrived despite the slings and arrows of 2013. That said, there are too many storm clouds on the horizon for this stock to escape turbulence indefinitely.
And Boeing must get a handle on the Dreamliner glitches now or risk customer goodwill — and future orders. The Sword of Damocles is not suspended over BA Chairman and CEO James McNerney’s head yet … but it will be if he can’t find a way to stop the bleeding.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.