Shares of beaten-down planemaker Boeing (NASDAQ:BA) have risen more than 12% over the past few days as confidence in the company started to return, aided in part by its work with Space Force. BA stock fell below $100 in March amid the novel coronavirus lockdowns but has since clawed back over 40%.
Some analysts became more bullish on the plane-maker following its first quarter results citing progress in paying back debt and improving cost-cutting measures. But I’d argue that Boeing is, at best, fairly valued right now as the firm has tremendous headwinds to contend with for the foreseeable future.
The Coronavirus Should Keep BA Stock Down
The current market is full of debate and speculation over how valuations can be rising even as economic data continues to paint a picture of doom and gloom. Much of the reason the market has been able to stage a recovery despite depression-era jobless data is the fact that investors are willing to look beyond the current pain.
For now, the stock market is predicting a quick economic recovery helped by plenty of stimulus money. A huge part of BA stock’s recent rally is simply due to an uptick in the wider market.
But it’s worth noting that Boeing, alongside its airline customers, will be one of the last companies to feel the effects of an economic recovery. That’s because air travel as we once knew it stands to either make a slow, painful recovery or be changed forever. Either of those scenarios is bad for Boeing.
No one is going to buy buying new planes at the previous scale for years to come. Many will be lucky if they can use the ones they’ve already got. That will weigh on Boeing, whose operations are already strained under the weight of its failed 737 MAX planes.
MAX Issues Persist
The MAX troubles are another reason BA stock deserved its coronavirus-induced nosedive. Going into the pandemic, investors were already skeptical about Boeing’s ability to bounce back from the MAX safety issues. Pilots unions were taking legal action, and there was some question about whether or not people would be willing to get on the planes even when they’ve been approved.
Those concerns are still valid as the company continues to work toward getting the planes back in the sky. Most are expecting MAX planes to remain grounded until the third quarter at the earliest — and even then, it’s a long shot.
Plus, the MAX issues highlighted a larger problem with Boeing’s corporate culture that can’t be fixed overnight. Boeing is still dealing with those problems on top of the coronavirus pain.
What’s Next for Boeing
Is Boeing going to zero? That’s unlikely. If nothing else, Boeing’s ties to the U.S. government will probably keep it from going under even in a worst-case scenario. But the upside for the planemaker is limited.
The current quarter is where coronavirus’ pain will truly show up, and it’s likely to be disastrous for Boeing. Now is also make-or-break for the U.S. economy as more states lift lockdown measures and try to move toward as successful reopen.
But preliminary results from Germany, where lockdown measures have been easing over the past few weeks, show the threat of a second outbreak is unavoidable. If the U.S. were to suffer a similar spike in cases as restrictions ease, consumers and investors might get spooked, which would trigger another selloff in equity markets.
Canaccord’s Kenneth Herbert echoed that sentiment, saying the firm’s Q2 results will probably show more damage. Although Herbert’s price target of $175 implies a 26% upside from where BA stock is currently trading, he cautioned that investors haven’t fully regained confidence in air travel, and that could bring on more volatility.
We believe that until investors get greater confidence in Boeing’s liquidity, and in the pace of the expected recovery in travel, the stock will see limited upside. We believe the risk around future production schedules continues to be biased to the downside, even with the substantial cuts announced by the company. We appreciate the implied upside in our $175 target could justify a more positive rating. However, with the current volatility in the stock, we are seeing much greater than normal movement and temporary price dislocations.
The Bottom Line on Boeing
As it stands, BA stock is still a risky bet. Until there’s evidence that consumers still want to fly as much as they did pre-coronavirus, Boeing’s $130 price tag is justified. Even if demand returns Boeing still has the MAX and its reputation to deal with, and that’s too much baggage in such an uncertain climate.
Laura Hoy has a Finance degree from Duquesne University and has been writing about financial markets for the past 8 years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
