Boeing Stock: Should You Buy the Dip in BA, or Steer Clear?

Barchart · 10/17 10:03

With a YTD loss of around 40%, Boeing (BA) is the second worst-performing Dow Jones Industrial Average ($DOWI) constituent. Only Intel (INTC) has fared worse than BA this year, as the chip giant fights for relevance at a time when other semiconductor stocks have been soaring to astronomical highs.

Boeing’s troubles have only been compounding over the last few months, and unsurprisingly, the stock has been falling to new lows. While BA has recovered slightly from its 52-week lows, that's little comfort to investors, as the stock has lost over half of its market cap over the last five years.

Boeing was once the bellwether of U.S. manufacturing, but the company has struggled on multiple fronts. Is BA stock a buy after the dip, or are investors better off staying away from the stock? We’ll discuss in this article, beginning with analyzing the reasons behind its underperformance.

Why is Boeing Stock Falling?

Boeing has faced several safety-related incidents since the unfortunate crash of Lion Air's Boeing 737 Max 8 airplane within minutes of takeoff in October 2018. Months later, an Ethiopian Airlines Boeing 737 Max 8 flight crashed, killing all 157 people on board.

The model was grounded afterward, and was allowed to fly only after a recertification. One might have expected the company to have learned its lessons, but that perhaps wasn’t the case, as in January a door panel blew out of a 737 Max in mid-air. Then, in April, the engine cover of a Boeing 737-800 fell off during takeoff, which prompted an investigation by the Federal Aviation Administration (FAA).

What made matters worse was the testimony by a whistleblower, who said that Boeing was aware of the safety issues, but they were swept under the carpet. The company replaced its CEO Dave Calhoun with newcomer Kelly Ortberg, but its woes are far from over. The aerospace giant has been battling a strike since last month, which is costing it an estimated $1 billion every month. The company’s balance sheet has been in a precarious position after three consecutive quarters of cash burn, and rating agencies have warned of a credit rating downgrade.

Boeing Stock Forecast

Boeing has received a consensus rating of “Moderate Buy” from the 24 analysts covering the stock. It has been rated as a “Strong Buy” by 15 analysts, while 1 more rates it as a “Moderate Buy.” Six analysts rate BA stock as a “Hold” while the remaining 2 rate it as a “Strong Sell.”

Boeing’s mean target price of $198.62 is over 28% higher than yesterday’s closing prices. While sell-side analysts are overall bullish on BA stock, there are two schools of thought. One side believes that BA’s woes are now behind it, and the company is turning things around, while others don’t expect a quick turnaround for the troubled aircraft maker.

The Bull and Bear Cases for Boeing

According to Wells Fargo Securities analyst Matthews Akers, the bullish case for Boeing has been built on the premise that the company will eventually fix its production issues. However, he believes that the real issue for Boeing is its weak balance sheet and the $50 billion in net debt that it holds. He is also concerned that the labor deal – if and when it is ratified – will further hit the company’s earnings.

According to Akers, Boeing’s free cash flows will peak in the next couple of years, after which the company will need to invest in developing new planes. He is also not convinced that the capital raise – which Boeing has since announced – will help address its issues.

Separately, Seaport Global Securities senior analyst Richard Safran is bullish on Boeing, and sees the capital raise and an eventual end to the strike as positive catalysts for the stock. He believes that a lot of negatives are already priced into BA, and finds the stock’s valuations compelling.

Safran believes that Boeing will generate a lot of free cash flows over the next few years, as it has already spent considerable money on developing new planes. He also pointed out that 777X deliveries should help add to the company’s cash flow kitty. While Safran agrees that Boeing’s recent launches have been a disappointment, he stressed that “one of the things that Boeing is really good at is taking lessons learned.”

Should You Buy the Dip in BA Stock?

I believe that while the safety issues have left a big hole in Boeing’s finances, the damage to its brand and reputation is particularly severe. The reputation of Boeing among travelers has fallen, and many are wary of flying in its aircraft. That said, neither flyers nor airline companies have many options; the industry is a duopoly, with Airbus (EADSY) being the other key player. While China’s state-owned Commercial Aircraft Corporation of China has developed a homegrown model and has sizeable orders from Chinese airlines, I don’t expect it to become a major global player anytime soon.

As for the capital raise, while it does take away the hanging sword of a rating downgrade to junk, it comes with a cost, as Boeing will need to sell shares at depressed price levels - leading to higher dilution. However, if the company can put the execution and safety issues in the backseat for good, and become a free cash flow powerhouse with new models, the stock could deliver good returns over the next few returns. There are a lot of “ifs and buts” in Boeing's bullish thesis, though, which makes me wary of the stock.

Given the company’s recurring issues with safety and execution, I would prefer not to bet on it doing any magic with the new aircraft, and would steer clear of the company - at least, at these prices.

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On the date of publication, Mohit Oberoi had a position in: INTC . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.