The advances of commercial airliners are amazing, as they have innovative designs, sophisticated computer systems and unprecedented energy efficiency. But those advances have also led to mind-numbing complexity that pose safety issues, leading to problems for Boeing (NYSE:BA) stock.
Unfortunately, that scenario has unfolded with the 737 Max. At the heart of the issue is the MCAS system that helps the plane avoid stalling. But in rare cases, it appears that it has done the opposite because of faulty sensor data. That could explain two horrific plane crashes, one in Indonesia and another in Ethiopia. Both occurred within about five months of each other. As a result, all 737 Max planes have been grounded.
Despite all this, BA stock has actually held up fairly well. For the year so far, Boeing stock is up close to 17%. But BA stock is off about 14% from the peak it reached in March.
So what can investors expect now from BA stock? Is this a good time to consider Boeing stock? Or should investors hold off on buying the shares? Well, first of all, let’s take a look at some of the pros of BA stock.
The non-cyclical trends affecting Boeing stock remain bright. Based on data from the International Air Transport Association (IATA), the number of global annual airline passengers is projected to double by 2037 to 8.2 billion. The key driver is growth in Asia, driven by robust increases in that continent’s wealth. By the mid-2020s, China is expected to be the world’s largest market for air travel, with India coming in at number 3.
Next, Boeing’s market is essentially a duopoly. Airlines have little choice but to work with the company, so its backlog stretches beyond a decade.
Boeing also has a strong balance sheet and should not have any problems dealing with the potential liabilities stemming from the 737 Max. This week the company raised $3.5 billion in a bond offering, which drew strong demand,
The Bottom Line on Boeing Stock
But of course, Boeing stock is not immune from problems. As China and India quickly become more important in the airline market, these countries will certainly flex their muscles. That could result in additional requirements for Boeing and price concessions by the company. What’s more, BA could face increased competition from China’s home-grown airplane manufacturers. Note that recently the Ethiopian ambassador to China visited one of China’s state-owned operators, Comac.
Now Boeing is working hard to resolve the problems with the 737 Max and get back on track. But that means it’s paying less attention to other parts of its business. For example, there are fears that the launch of the company’s mid-range NMA midmarket plane could be delayed. In fact, it looks like Airbus is already trying to capitalize on the potential delay by taking market share with its A320. Keep in mind that Airbus is on track to become the No.1 jetliner manufacturer in 2019.
But in the near-term, the headline risk could be the biggest risk factor for Boeing stock. As the investigations of the 737 Max progress, it seems like a good bet we’ll learn more negative details. After all, it looks like the company failed to notify Southwest Airlines (NYSE:LUV) that a safety feature on the 737 Max was turned off.
And finally, Boeing stock, with a price-earnings ratio of nearly 22, is not cheap at current levels, . By comparison, Lockheed Martin (NYSE:LMT) and General Dynamics (NYSE:GD) have P/E ratios of 17 and 16, respective;y.
So for now, there really should be no rush to get into BA stock.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.