Boeing Co Stock Has Flown a Little Too Far

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Boeing stock - Boeing Co Stock Has Flown a Little Too Far

It’s truly been an incredible run for Boeing Co (NYSE:BA). And the run has fundamentally changed BA stock. Just eighteen months ago, BA traded at barely one-third of its current price and had a mid-teen forward price-to-earnings ratio. The Boeing stock dividend even yielded over 3%. BA was a large-cap cyclical stock — one with potential out-year risk given the ever-present uncertainty surrounding the passenger airline industry.

Since then, Boeing stock has exploded. BA stock was the fifth-best performer in the entire S&P 500 in 2017, gaining 89% (that doesn’t include the Boeing stock dividend). It outperformed better-known high-flyers like Nvidia Corporation (NASDAQ:NVDA), PayPal Holdings Inc (NASDAQ:PYPL), and Micron Technology, Inc. (NASDAQ:MU), among many others.

And the gains do make some sense. The airline industry remains strong, and Boeing is having success with its defense business as well. Boeing is taking market share, one reason why BA stock has steadily outperformed that of Airbus Grp/ADR (OTCMKTS:EADSY). Fuel costs have been favorable for airlines, but still high enough for customers to look for next-generation aircraft. And with what’s still a duopoly in the jumbo jet market, Boeing has been able to take pricing as well.

Despite that good news, I argued at the end of last year that it was time to take profits in Boeing stock. With BA up almost 10% from those levels, I still think that’s the case. Trade war concerns surround BA stock at the moment. Valuation isn’t unreasonable — but it does look potentially stretched. In a more nervous market, there seem to be safer plays than Boeing stock.

Is a Trade War Coming for Boeing Stock?

Boeing stock has been one of the bigger victims of trade war fears already. BA stock has pulled back 13% from its late February highs, including a 5% drop the day tariffs were announced.

On this site, James Brumley largely dismissed those worries — and I’m inclined to agree with him. Wall Street analysts have argued that the effect is likely to be minor at worst, for one key reason. China needs U.S. aircraft to satisfy existing demand, as its in-country options are still years away from production. Airbus is basically sold out for years to come, so any tariffs on Boeing simply will raise the prices paid by Chinese carriers.

Still, at least in the short-term, the worries could further pressure Boeing stock. And because Boeing supplies such a cyclical space, there’s an indirect effect as well. If trade war concerns make investors less confident in the U.S. and worldwide macroeconomic environment, Boeing stock likely will be a victim.

BA Stock Still Looks Expensive

Longer-term, the concerns are different. The issue is that the huge gains in Boeing stock have come in large part because its earnings multiple has expanded.

And that’s a potentially dangerous thing for a cyclical stock. It’s easy to forget after a nearly decade-long economic recovery, but Boeing can struggle if macro sentiment changes — because the airline customers that drive ~55% of revenue will take a hit. Indeed, revenue barely moved into and out of the financial crisis.

In fact, revenue growth was negative in each of the last two years. Impressive margin expansion and, now, help from tax reform is driving much of the earnings increases seen of late. But the low-hanging fruit has been harvested, it appears, and without an acceleration in revenue growth, profit growth will slow eventually.

Meanwhile, BA stock trades at almost 20 times 2019 EPS estimates. That doesn’t sound like a high multiple in a market that’s trading, as a whole, at high-teens levels. But for a cyclical stock, it is — particularly for a stock near the top. And it’s a multiple that’s notably out of line from the historical range of Boeing stock.

To be sure, BA stock isn’t so expensive as to suggest a short. But the same concerns I cited in December still remain. Earnings growth is likely to decelerate over the next decade. The earnings multiple seemingly has little room to move much higher. One of those two facts has to change for Boeing to keep soaring higher.

Long-term, I just don’t see quite enough evidence to believe that will be the case.

As of this writing, Vince Martin has no positions in any securities mentioned.

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/2018/04/boeing-co-stock-flown-little-far/.

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