Boeing (NYSE:BA) stock reminds me of the old Timex slogan that says “it takes a licking and keeps on ticking.” Just yesterday, the company reported that it had negative net orders for 2019. What does this mean? Well, in light of the 737 MAX scandals, Boeing received more cancellations than orders.
This hasn’t happened in more than three decades. But, it has happened before, so this too shall pass. Yes, Airbus (OTCMKTS:EADSY) logged orders for 768 new planes while Boeing lost orders for 87. But this is where Boeing’s upside potential for 2020 comes from.
The company is in a duopoly against Airbus. Normally they have binary outcomes as to who wins. But in reality, both companies win. It’s hard to mess up this setup because they are both set to succeed for at least a decade down the line. Despite the headlines, BA stock is one to hold for the long term.
Boeing Is Struggling With Self-Inflicted Wounds
In 2019, BA really came close to throwing it all away. The headlines last year were unimaginable, and they keep on coming. Although they are getting more shocking, they are not getting worse. The horrible deaths that the 737 MAX crashes caused are as bad as it gets. So unlike the broken hearts from the tragic events, time will heal the stock.
Wall Street will find out soon if Boeing has seen the trough already. The company will report earnings Jan. 29 and I expect the new CEO to outline a sharp plan for 2020. If he delivers a confident statement highlighting what is bad, and how the company intends on handling its issues, BA stock should rally in relief. This is not the time to panic and sell the stock on inflammatory headlines that don’t introduce new problems.
In addition, there is another bullish trigger for BA stock this year. Although opinions differ on timing, sometime this year the 737 MAX will fly again. The news will bring back buyers who have been waiting for clarity. Its grounded planes once again flying will close an ugly chapter in the company’s history. Then the onus will be on management to re-frame the whole episode as a learning experience.
From a traditional trailing price-to-earnings ratio of 50, Boeing stock’s valuation is high. But its price-to-sales ratio is just above 2.3. So in this case, the price-to-earnings ratio is not a metric I would use to judge an entry point into BA stock. The 2019 order flow was disastrous, but it won’t take long before the company can fix it.
This Will Be a Recovery Year for BA
There is always the risk of outside opinion. Ratings agencies are watching Boeing, and they won’t hesitate to re-rate its credit. To me it would be insane to do so, but we’ve seen them downgrade the United States’ credit rating once because politicians missed a deadline by a few hours.
The other risk may come from within the company itself. Management may decide to reduce or cut the dividend if this cash crunch persists. Or maybe it will issue a secondary offering that would temporarily hurt the stock price.
All this is speculation, so for now investors should stick with the facts. Boeing has a very healthy business that is now tackling a few challenges. It has the bench and resources to rectify them. It is also in the best interest of the U.S. government to help Boeing out. The company’s metrics are large enough that they do impact U.S. economic reports. It’s likely the incumbent presidential administration will want to prop those up.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
