The sideways trading in Boeing (NYSE:BA) appears to have come to an end. The Boeing stock price has risen almost 15% since early last month, with BA stock sitting just off yet another all-time high.
The recent gains of Boeing stock are somewhat surprising to me. Admittedly, I’ve been far too bearish about BA stock in the past. But it’s not as if the company’s recent news has been all that good. The company appears to be continuing to have production issues with its 737 plane. The trade conflict between the U.S. and China – which generated 13% of Boeing’s 2017 revenue – hasn’t been resolved. The company’s Investor Day last month appears to have been a catalyst for Boeing stock price, but the company kept the event almost “hush-hush.”
Over the long-term, Boeing stock still looks attractive. Global demand for airplane travel is only going to grow. Boeing is outperforming rival Airbus SE (OTCMKTS:EADSY). But with BA stock trading at 22 times the company’s forward earnings, and with some potential near-term disruptions, I’m still not sold on BA stock. Of course, I’ve been wrong before.
BA Stock Rises Despite Bad News
It’s possible some investors may be positioning themselves ahead of Boeing’s earnings on October 24. Boeing has an impressive, recent history when it comes to earnings reports. The company’s bottom line hasn’t come in below analysts’ consensus estimate in over two years, including a monster Q4 beat back in late January.
But the run comes amid some short-term concerns surrounding Boeing’s 737. As of last month, Boeing had an estimated 115 737s waiting for engines. Delays at suppliers, including Boeing spinoff Spirit AeroSystems (NYSE:SPR), appear to be the culprit.
Boeing made an attempt to alleviate concerns about that issue at its Investor Day a month ago. But it seemingly did not seek to widely publicize the event. The company didn’t webcast the event, as it has in past years. One aviation expert called the event “highly choreographed [and] limited to those favored.” And analysts came out of the meeting unconvinced that Boeing would meet its 737 production targets this year.
Meanwhile, China’s original threat to tax Boeing’s planes was largely symbolic; the cited weight range excludes the company’s fourth-generation 737 MAX models. But the battle between the U.S. and China shows no sign of abating, and the Chinese market is key for Boeing going forward. China accounted for 13% of Boeing’s revenue last year, but CEO Dennis Muilenburg said at a conference in August that “roughly a third of our 737s” are being delivered to the Asian country.
Both issues seem to be strong headwinds for BA stock, but Boeing stock price has risen nonetheless.
BA Stock Through the End of the Year
At least from a short-term standpoint, that situation makes BA stock somewhat risky. Boeing could discuss its plans for rescuing the 737 during its Q3 earnings call, and higher costs for storage and bringing back retired workers could put a damper on margins. Another flareup in the U.S.-China trade conflict could lead investors to take profits as well.
And again, BA stock isn’t cheap or close to it. Trading at roughly 22 times Boeing’s consensus forward earnings multiple, BA stock is quite expensive for what was until recently considered a cyclical name. Clearly, investors now see BA stock as a secular play on global growth and travel demand, as I argued last month. But it won’t take much of a macro shock to make at least some investors wonder if the shift is quite as dramatic as the three-year, 190% increase in the Boeing stock price might suggest.
In short, I’d be careful with BA stock over the rest of the year. And it would take quite a pullback in BA stock before I would call it compelling. Admittedly, the news has continued to be mostly good for BA: United Continental (NYSE:UAL) just placed a big order, and Boeing has posted a number of government wins over the past couple of weeks.
But from a broad standpoint, this still is a somewhat cyclical stock facing likely increases in key input costs like steel and aluminum. End airline customers like United and Delta Air Lines (NYSE:DAL) have had a few strong years. But weak trading in those issues shows that investors still don’t trust that industry.
Airbus remains a tough competitor, though how tough is up for debate. Boeing is a great company, to be sure, but one that still has a reasonably tough business model.
Historically, Boeing stock was priced accordingly. Now it isn’t. The recent gains of Boeing stock price show that investors think that BA has turned a corner and become a secular proxy for global growth. It will be interesting to see if those investors still see Boeing stock that way in 2019 and beyond.
As of this writing, Vince Martin did not have any positions in any of the securities mentioned above.
