The recent warming of relations between the U.S. and North Korea couldn’t have come at a worse time for Boeing (NYSE:BA). Known as a symbol of American might and capitalism, Boeing features civilian and military business divisions. Now, both sectors are heavily challenged due to President Trump’s revamped foreign policy, making BA stock suddenly look risky.
Boeing’s reversal of fortune is a reminder just how quickly things can change in the markets. Up over 20% year-to-date, BA stock is still neck and neck with Dow Jones Industrial Average leader Nike (NYSE:NKE). However, for the month of June, BA shares dipped below parity. NKE, on the other hand, found its second wind, charging to a nearly 5% lead.
Unfortunately for the iconic airliner, the troubles don’t appear to have a quick resolution. First, the meeting between President Trump and North Korean leader Kim Jong-un sparked a paradigm shift in American foreign policy. As I recently argued, by meeting with Kim, the U.S. abandoned its absolutism in never dealing with rogue, terrorist organizations.
That remarkable shift applied immediate pressure on defense companies, which cynically thrive on conflict. Industry stalwarts, like Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC) and Raytheon (NYSE:RTN), have conspicuously slipped since the groundbreaking meeting. The markets especially hit BA stock hard, which dropped more than 4%.
But the more worrisome aspect is the Trump-imposed China tariffs. Because the U.S. no longer needs China to apparently spark a peaceful resolution with North Korea, the White House can take more aggressive measures. While that might be a huge political victory for the Trump administration, it puts Boeing in a tricky situation.
As our own Aaron Levitt points out, less than a third of Boeing revenues derive from military warplanes and equipment.
Tough Competitive Environment
As with many other industries, Boeing management quickly realized that Western markets are mature and saturated. To sustain growth, companies have increasingly looked eastward, either to the Middle East or the Far East.
That’s why I’m certain Boeing executives threw up in their mouths a little when President Trump not only announced the China tariffs, but ratcheted them. I can see Boeing standing with Trump on issues like North Korea or Iran. Boeing doesn’t do much business with these nations, if at all. Plus, the company is an American establishment, the builder of Air Force One.
But China occupies a completely different category. With 1.4 billion people, the Asian powerhouse fits four times the U.S. population within its borders. As its economy grows, so too will per-capita GDP. Inevitably, this dynamic translates to increased demand for domestic and international travel, and by logical deduction, airliners.
Not only that, Seeking Alpha contributor Dhierin Bechai forecasts that China alone will provide a $1-trillion airliner market. That’s not something from which you can casually walk away. Yet, that’s exactly what Boeing will be forced to do if the China trade wars spiral out of control.
Critical to how BA stock responds long-term is management’s ability to control the competition. Regrettably for them, European manufacturer Airbus (OTCMKTS:EADSY) doesn’t have to contend with the same geopolitical pressures. While China considers ways to potentially punish Boeing, Airbus can slide right in.
Furthermore, Airbus dominates Boeing in the sales race. Last year was the fifth consecutive year that the European firm bested Boeing in aircraft orders. Airbus also secured its largest order in company history at the Dubai Air Show last December.
It’s bad news for BA stock, certainly, but I wouldn’t give up just yet.
How Trump Tariffs Could Benefit BA Stock Longer Term
An idea that political analysts rarely explore is that President Trump may be correct with his tariff impositions. I know, it’s an extremely unpopular idea, in large part because American industries hurt now due to the Chinese response.
That said, Trump, or any American leader, must respond to intellectual-property theft allegations. If the situation goes unaddressed, it sends the signal that the U.S. is open to economic exploitation. Saying and doing nothing is the easy diplomatic answer, but in the long run, it could damage American enterprise.
Agree or disagree, what’s undeniable is that the Trump administration is the ultimate disruptor. It’s making its presence known, and unlike prior administrations, will back up tough talk with tough actions. China has initially responded with their own tariffs, but deep down, it knows it can’t trade blows with the U.S.
We’ll hurt, there’s no question about that. But we can also lay down a chokehold on the Chinese economy. Fortunately, this is an outcome that neither side wants. I expect cooler heads to ultimately prevail, especially since Trump proved willing to negotiate with brutal dictators.
For now, investors are panicking over Boeing’s prospects. Use this opportunity to carefully build your position in BA stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.