BA Stock Faces Headlines, But Outlook is Still Bright
A small decline in production at Boeing Co (NYSE:BA) was expected. But nobody expected it to be such an extent as to push Boeing stock down. It’s true that the company advised that it would deliver between 740 and 745 aircraft in 2016, compared to the 762 aircraft delivered in 2015. Moreover, the Seattle-based aerospace giant predicted 535 orders in 2016, but it has so far received only 335. (Source: “Scale Of Boeing’s Widebody Sales Challenge Revealed,” Aviation Week, August 22, 2016.)
These figures, along with rumors that the new United Airlines CEO has a bias for Airbus, have put pressure on Boeing stock. So should you be bearish on BA stock this year? It’s true that there are strong headwinds in the company’s direction. Yet it’s also true that the company’s market lift remains strong, while a huge backlog will by itself propel deliveries—hence revenue—for the next seven years.
So, while Boeing is trading at about $130.00 and is down about 1.6% year-to-date, it’s also true that it’s up 10.79% for the past six months. Shareholders speak through their trades. We still read their bullish sentiment loud and clear. The airplane-maker could decide in the coming months to further slow production of its highly profitable “777,” from its current 8.3 aircraft per month to seven per month in 2017, in order to make room for more “737 MAX” production and other variants, which make up the bulk of the company’s order book.
Until recently, the plan was to increase “787” production from 12 aircraft per month today to 14 per month in 2020. (Source: “Boeing 777 Jet Production Decision Expected,” The Wall Street Journal, August 10, 2016.)
Boeing Stock Investors Shouldn’t Be Worried
Nobody is advising going short on BA stock just yet. The main reason for the continued optimism—and this cannot be stressed enough—is the backlog. If anyone wants to press the panic button on Boeing while still maintaining a modicum of credibility, he/she should wait at least two years before doing so.
The company still has a number of cash-cow products: the 777 and 737. Both of these will spawn various upgraded versions to keep sales flowing and assembly lines running. It’s true that Boeing has to keep selling, even as the backlog remains high.
But, with some exceptions, such as the medium-haul narrow-body market with new entrants Bombardier, Inc. (TSX:BBD.B), the airliner market is a two-horse contest between Boeing and Airbus. This is an important consideration because the Seattle company will likely let go of the 747. Currently, Boeing maintains that its production forecasts are unchanged for this year, but newer versions of the 777 will compensate for the 747 in the longer term.
Boeing will be deciding which models to keep making and which to scrap over the next year. This will keep BA stock subject to the market’s whims more than usual. It will be a delicate period. Turbulence will be inevitable, but the strong demand for single-aisle aircraft will help generate revenue. In addition, as oil prices remain low, airlines will be eager to take advantage of the lower operational costs to update fleets.
The Bottom Line on Boeing Stock
Therefore, investors should consider 2016 to be a transition year for BA. The transition will allow the airplane-maker to review plans and prepare the new models to boost orders by the end of the decade (variants of the “777X”). Surely, some might see the start of a bearish industrial cycle for air transport. The industry has known such periods in the past. But is this one of those periods? Not really.
With fuel costs so low, the airline industry will remain busy. For those needing a more concrete bullish factor, the reminder comes from the backlog. Boeing has at least 5,697 planes to assemble and deliver. So, the company’s managers and investors alike can still sleep soundly at night.