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Boeing Co Stock Is Going Nowhere Until It Does This (BA)

If you want to invest in Boeing Co (BA) stock, wait. It has a lot of problems right now, and there won’t be any clarification until the company releases its first-quarter earnings on April 27.

Boeing Co Stock Is Going Nowhere Until It Fixes This (BA)Even then, it might make sense to pass on Boeing.

Investors have sensed for some time that Boeing faces growing challenges. BA stock was down 12.2% in the first quarter, the second-worst performance among the 30 Dow stocks after Goldman Sachs (GS), which fell 12.9%. BA’s decline came despite rising 7.4% in March. Boeing stock is down over 19% since a closing peak at $158.31 in February 2015.

The March gain for Boeing stock might have been bigger, but the aerospace giant confirmed it expects to cut around 4,500 jobs at least in the first half of the year. The Seattle Times suggested job cuts could hit 8,000. Boeing stock fell 3.9% for the week as a result.

Boeing’s struggles are centered, at least in the short term, on its workhorse product line, the short-to-medium-range 737.

BA Stock’s Troubles Start with 737

The 737 is the most popular commercial jet ever built. Current versions can fly short-hops such as Washington to New York and longer routes, such as New York to Seattle.

But in the last few years, Boeing has been losing business to Airbus A320, built by Airbus Group (EADSY), the European aircraft maker.

To understand why these planes are so important, consider: There were some 8,730 Airbus planes in operation at the end of February. Nearly 45% of those are A320s. Boeing has built some 8,800 737s in various formats since 1967, about 60% of its total output.

In the competition for orders between the new generation Boeing 737 MAX and the Airbus A320, Airbus is ahead with 3,344 orders, compared with Boeing’s 3,072. (The numbers are through February.) In 2015, Airbus won 60% of new orders for short-to-medium-range planes over Boeing.

Both planes have tweaked designs, added more advanced electrical and navigational systems and are mounting new, more efficient engines. The goal is to cut fuel consumption by upwards of 15%.

One reason Airbus is ahead is that the company committed to the A320neo nearly two years ahead of Boeing. BA stock had been toying with replacing the 737 with an entirely new plane sometime after 2020, but was forced to adjust when Airbus started getting orders. (Neo, in Airbus talk, means new engine option. Current generation A320s are known as A320ceo — for current engine option.)

Airbus has delivered the first two A320neos to Lufthansa (DLAKY), the German airline. The 737 Max had its maiden flight in January, and Southwest Airlines Co (LUV) will take delivery of its first of the new models only in the third quarter of 2017. Southwest is the world’s largest operator of the 737.

Adding to that basic problem of timing is that BA has had to contend with the rapid appreciation of the dollar in 2013 and 2014. That has let Airbus price its planes more aggressively.

And a third issue is that Boeing can’t say its plane is so much more advanced than the A320 (or competing products from Embraer SA (ADR) (ERJ) and others) that it can justify a premium price for the plane. Indeed, some would argue the A320 is ahead of Boeing.

And airlines know it. Boeing was shocked in 2011 when American Airlines Group Inc (AAL) , long a reliable customer, split an order for 460 short-range planes, with Airbus winning 260 of the orders.

In a deal announced early Monday, Alaska Air Group, Inc. (ALK) will buy Virgin America Inc (VA) for about $2.6 billion. Alaska flies 152 737s while Virgin America flies 60 Airbus A 319s and A320s. JetBlue Airways Corporation (JBLU) had been the expected winner because it was is an Airbus shop.

So Boeing stock is caught in a bind that’s certain to squeeze profits in 2016 and maybe beyond. The job cuts that are coming could aggravate the situation. Boeing has said most of the jobs being trimmed will be in in management, but there’s no guarantee that manufacturing won’t be affected.

Job cuts on manufacturing lines could threaten Boeing’s goal to boost 737 production from 42 planes a month to 57 a month by 2019. The question is if it will have the workers on hand to do the job.

And the 737 isn’t their only problem.

  • Boeing is basically winding down the manufacturing of its iconic 747. It’s too big and expensive to fly except on the longest of flights, and orders are falling. In 2015, the company wrote off $885 million against the plane. (Airbus has a similar problem with its double-decker A380.)
  • Boeing’s 777 wide-body jet is facing new competition from the Airbus A350.
  • The 787 Dreamliner, launched with enormous fanfare, had such huge cost overruns and delays at the beginning of development that it is not profitable now: “We continue to have near breakeven gross margins,” Boeing’s 2015 10-K report says. The plane might be only mildly profitable at best. Or Boeing might have to write down some of its investment in the plane.

Boeing stock is expected to report first-quarter earnings of $1.82 a share, down from $1.97 a year ago. Revenue is expected to slip 1.1% to $21.90 billion. The consensus Street estimate for Boeing is full-year earnings of $8.50 a share, up from $7.72, with revenue of $93.84 billion down 2.4% from 2015.

The guidance that comes with the first-quarter report will tell the story of where Boeing stock will head, which is why buying the shares now is risky. The chart since early 2015 is weak. And while the stock jumped 34% between the Feb. 11 low and its March 21 intraday high of $136.78, it has fallen about 6.5% since then.

All of this means BA stock is not a compelling buy. It’s more of a compelling avoid until it’s clear that Boeing is on the road to making the 737 the dominant aircraft in its market once again.

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

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