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Boeing Earnings Soar 52%, but BA Stock Falls

Commercial aircraft sales soar, but significant challenges remain

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Headwind: Challenges For KC-46 Tanker Program

Boeing’s KC-46 Pegasus tanker, a 767-based aircraft that will replace the U.S. Air Force’s 400 KC-135s, has had some teething troubles in development and reportedly is some $1.1 billion over budget, according to the Air Force Times. Boeing must eat some of those costs, and it faces the risk of losing the balance of the $52 billion deal if it can’t deliver the first 18 aircraft of the 179-plane total to the Air Force by August 2017. BA took a $272 million after-tax charge in the second quarter to cover increased engineering and integration work on the Pegasus.

Headwind: Airbus A330neo Launch Was Big

Measured only by the numbers, European rival Airbus took top honors at last week’s Farnborough Air Show, inking deals for 496 aircraft valued at $75.3 billion, compared to BA’s 201 planes valued at $40.2 billion. The A330neo, which officially debuted at Farnborough with 121 orders valued at $33.2 billion, is EADSY’s answer to the compelling demand growth for single-aisle aircraft.

Headwind: SpaceX Could Beat Out Boeing/Lockheed Martin Team on Rocket Deal:

Just as BA’s Defense and Space Systems unit was celebrating the first year of an $11 billion contract with the U.S. Air Force, leave it to Elon Musk to shake up the status quo. United Launch Alliance (ULA) — a joint venture of Boeing and Lockheed Martin (LMT) that was preparing to sell 36 rockets to the Air Force military and intelligence satellite launches — was sued by SpaceX and Tesla (TSLA) founder Elon Musk. Musk has argued that the contract was not put out for competitive bid by the Air Force in 2012 since ULA was the only certified bidder. Because SpaceX launches are far cheaper than ULA’s and the latter’s use of some Russian rockets could be a violation of the appropriation rules, members of the Senate Armed Services Committee may be considering dumping ULA from the contract altogether, according to a Forbes report.

Bottom Line

BA stock opened Wednesday down nearly 3% despite the strong Boeing earnings report. Boeing stock has been at a high altitude since the beginning of 2013, riding a tidal wave of new orders and increased production, particularly of the 787 Dreamliner. BA stock has an attractive current dividend yield of 2.2%, but trading at 15 times forward earnings, it looks overvalued now and is overdue for a breather.

Although the pullback in BA stock might provide a good entry point, keep a close eye on the production and delivery rates on existing aircraft like the 787 and progress on new programs like the 777X. Commercial sales softened the blow of the KC-46 costs, but any missteps in that program over the next couple of quarters could stall Boeing stock. If Elon Musk’s SpaceX prevails in its bid to overturn ULA’s rocket contract, that would be a sure sign to sell BA stock.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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