Here’s Why Everyone Is Wrong About BA Stock
It’s the only possible explanation for the turbulence that has brought down Boeing Co (NYSE:BA) stock on Wall Street…
The offending surprise that has pushed Boeing stock down a significant nine percent on January 27 is that for the first time since 2010, the U.S. aerospace giant announced a decline in deliveries of commercial aircraft. The extent of the share drop would suggest a miss in the dozens; however, the revised output involves a shift from just 762 aircraft delivered in 2015 to 740 to 745 aircraft in 2016.
Yet Boeing has experienced six years of uninterrupted growth between 2010 and 2015. The company posted fourth-quarter profit that exceeded analysts’ expectations, even though revenue dropped 3.7% to $23.6 billion. Sales in its commercial airplanes division slipping four percent, as deliveries fell seven percent. (Source: “Boeing shares clobbered by weak outlook,” MarketWatch, January 27, 2016.)
For the quarter ending December 31, Boeing posted earnings of $1.03 billion, or $1.51 a share, compared to $1.47 billion, or $2.02 a share, in 2015. Analysts had forecast $1.28 a share in adjusted earnings on $23.53 billion in revenue. (Source: Ibid.)
The punishment was immediate: BA stock dropped from $128.00 to close at $116.00 on January 27. The Boeing stock plunged as much as 9.5%, even amid strong earnings—especially as the company’s European rival, Airbus, just signed a $20.0-billion-plus deal with Iran for 127 new airliners.
BA Stock Will Likely Suffer Some Short-Term Pain
Nevertheless, Boeing stock will recover as the market absorbs the surprise reduction of the “Boeing 777” aircraft. The latter model is heading toward retirement and will be replaced by the “777X,” which will debut in 2020. (Source: “Boeing shares drop, investors brace for slow deliveries, profit hit,” Reuters, January 27, 2016.)
Boeing explained that the lower production rate for some models is due to the halving of the “747-8” production. Plus, while the 777 cuts were announced today, the market had long expected a drop in the production of this model due to the transition to the 777X, its successor, which is scheduled for 2020.
By comparison, Boeing’s main rival, Airbus, expects to deliver more than 650 aircraft in 2016, at least 15 more compared to 2015. However, this is still lower than Boeing by an order of at least 100 units.
Standard & Poor’s was one of the first to challenge the exaggerated market reaction by keeping its rating unchanged. Standard & Poor’s certainly believes that the predicted delivery drop in 2016 means lower profits in 2016, but it also still expects the financial results to improve over 2015. S&P analyst Jim Corridore noted that as disappointing as the outlook for revenue and aircraft deliveries was in 2016, holders of BA stock should remember that the company has a $490-billion backlog. (Source: “Boeing adjusted 4Q profit beats, 2016 outlook disappoints,” Metro News, January 27, 2016.)
The revised production targets for BA stock and for Airbus Group SE (EPA:AIR) have gained importance in recent years, becoming a significant barometer for industry experts, because airlines only pay when they take possession of the aircraft. In some ways, Boeing and Airbus have become victims of their own success, because both manufacturers have stressed the importance of their order books, which in turn raises questions about their ability to meet their deadlines.
The “Airbus A380” and the “Boeing 787” are two classic examples of production problems that translated to huge delays—even if these were groundbreaking airliners from both a technological and industrial perspective.
In that regard, BA stock can rely on the fact that as of December 31, Boeing’s order book involves 5,795 units valued at $489 billion, accounting for well over 7.5 years of production at current rates. (Source: “Boeing Will Sustain Its Current Market Share In Commercial Airplane Deliveries,” Forbes, September 8, 2015.)