It’s been a rough month for Boeing (NYSE:BA). stock There has been a storm of controversy surrounding the company following two very similar, fatal crashes involving Boeing’s 737 Max 8 planes.
This controversy has left investors in a “sell first, ask questions later” mood when it comes to Boeing stock, and BA stock has shed nearly 20% in March alone.
Momentum traders are telling investors to stay away from Boeing, warning that BA stock is a falling knife that’s still waiting for the other shoe to drop. Meanwhile, contrarian investors are saying that now is the time to get aggressive on Boeing stock. Their logic is that this is a solid,company with a positive, long-term growth outlook going through a rough patch which has left shares underappreciated in the near-to-medium term.
Who is right about Boeing? I have to side with the momentum traders. Before the selloff, Boeing stock was very richly valued, and BA’s stock price did not reflect any possibility of bad news.
Recently, Boeing has had nothing but bad news, ranging from bad press to order cancellations to criminal probes to slowing economic growth concerns. Boeing stock has consequently dropped tremendously. But it’s not back to its normal valuation levels, and until that happens, I wouldn’t consider buying BA stock.
There will come a time when this dip in Boeing stock is worth buying. But that time is not today. This stock will fall further before it turns around.
The Headwinds Keep Piling Up
When it comes to Boeing, it seems like the bad news just won’t stop piling up. When investors find themselves in that sort of situation, it’s always better to assume that more negative news is on the way.
Boeing’s recent problems started with two fatal crashes involving Boeing’s new 737 Max 8 planes. The Max 8 planes were grounded by governments around the globe.
Then, word got out that the U.S. Air Force had temporarily lost trust in Boeing’s quality control abilities. Indonesia’s national airline cancelled 49 orders for 737 Max 8 jets. Meanwhile, a criminal investigation has been launched into the FAA’s certification process for the 737 Max 8, and Boeing has become a larger and larger target of public scrutiny.
The bad news will continue for BA. There were two fatal crashes involving the same plane model in five months, and data is showing that they were most likely caused by a quality-control issue. As a result, the U.S. Air Force won’t be the only institution that will lose trust in Boeing, Indonesia’s national airline won’t be the only airline to cancel its previous orders from Boeing, and the criminal investigation won’t lose steam anytime soon.
That means that the owners of BA stock should expect another shoe to drop soon. And another one after that. And another after that.
This scandal is far from over. Until updates are issued for the Max 8, the investigation is over, production of them resumes, and customers start buying them again, uncertainty will weigh on investors’ confidence and drag Boeing stock lower.
The Valuation Doesn’t Add Up Yet
Eventually, the big drop of BA stock will turn into a buying opportunity. After all, this is a rock-solid company supported by healthy and stable long-term growth fundamentals. Ultimately, those fundamentals will push Boeing stock higher in the long-run.
But it’s not yet time to buy Boeing stock on weakness.
At the current moment, BA trades at just over 18 times analysts’ fiscal 2019 consensus earnings estimate for the company. But FY19 earnings estimates have not come down at all over the past several days and weeks.
They will drop, however, as a result of the 737 crisis. Thus, when all is said and done, fiscal 2019 EPS estimates may drop about 5%, settling around $19.20.
Using that reasonable, new forward EPS estimate, BA stock is still trading at 19 times the company’s earnings outlook. That’s a pretty big multiple for a company whose revenues are increasing at high-single-digit to low-double-digit percentage levels, with escalating fundamental and sentiment headwinds. Indeed, 19 is above the stock’s average forward multiple of the last five years: 18.5.
That makes no sense. Boeing is in the midst of its worst crisis in several years, and yet Boeing stock still trades at an above-average valuation. As long as that remains true, investors won’t be in any rush to buy the dip of Boeing stock.
The Right Time to Buy Boeing Stock
Assuming fiscal 2019 EPS estimates do fall to around $19.20, then a below-average, 18 forward multiple on that equates to a reasonabl,e “bottomed-out” price target for Boeing stock of around $345. Thus, I’m not interested in buying the dip of BA stock until the shares fall below $350.
The Bottom Line on BA Stock
Boeing stock has been hit hard by the Max 8 crisis this month. This pain will continue as long as the bad news keeps piling up and the valuation of BA stock remains extended.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
