Time to Bail on Boeing Stock?
Boeing Co (NYSE:BA) has hit a new snag with its Boeing “787” airliner. After a series of issues since launch, including faulty lithium-ion (Li-ion) batteries that could catch fire on the first 787’s off the line and concerns with wing joints in 2014, the Federal Aviation Administration (FAA) has issued a warning about the Boeing 787’s engine. Versions equipped with General Electric Company’s (NYSE:GE) “GEnx” engines are prone to shut off mid-flight. Boeing stock dropped slightly on Monday, but is this the signal to go short on Boeing stock?
That’s not quite the case. In fact, it would be foolish to consider shorting Boeing stock. Indeed, while the FAA announcement carries dramatic weight, the problem already has a fix—and it’s more manageable than most news headlines are reporting.
On January 29, one of the two engines of a Japan Airlines-operated 787, equipped with a “GEnx-1B PIP 2” engine, stopped working suddenly as the plane was flying at 20,000 feet above sea level. The crew was unable to revive it, but the plane was able to land with one engine, an older version of the “GEnx-1B,” the “PIP 1,” minutes after the incident.
There have been no other incidents, as GE has since issued a recall to fix the problem with its engines. GE said that more than 40 aircraft have already undergone the recall and repair process and that the remainder will get the modifications during regularly scheduled “A” checks to avoid any disruption for airlines. (Source: “FAA Mandates Icing Rework For GE’s Upgraded 787 Engine,” Aviation Week, April 21, 2016.)
The FAA has also mandated revisions to fan ice removal procedures and crew briefings in the 787-flight manual. The FAA’s warnings concern only 43 aircraft in the United States. But there are some 175 similarly equipped 787 aircraft owned by 29 airlines worldwide, according to Boeing. As noted, GE is already taking care of the problem.
The investigation of the Japan Airlines incident, meanwhile, concluded that ice buildup in the blades produced friction that damaged the engine and caused an in-flight shutdown.
Given the known cause and fix for the problem, and the fact that it affects General Electric—GE stock is also down less than one percentage point—there is no reason to go bearish on Boeing stock.
Nevertheless, Boeing stock will be the subject of much speculation, as the company prepares to report its first-quarter 2016 earnings ahead of market open on April 27. Wall Street predicts $21.9 billion in revenue, a decline of one percent year-over-year growth, with earnings per share (EPS) of $1.81, down two percent year-over-year. (Source: “BA earnings date,” NASDAQ, April 25, 2016.)
The market has already taken into account the fact that Boeing’s short-term outlook is not as bullish as the latter quarter of the year. There is also the fact that Boeing has managed to pull off a surprise in each of the last four successive earnings reports. Rumors point to the strong chance that Boeing might deliver EPS of $1.92, more than $0.10 higher than expected. (Source: “Is Boeing Stock A Buy Ahead Of Q1 2016 Earnings?” AmigoBulls, April 22, 2016.)
Boeing has seen flat demand for its long-range airliners compared to 2015, when it also delivered more airplanes, softening cash flow (Boeing makes money upon delivery). The long-range forecast is bullish, given that Boeing has a backlog of seven years and fully booked!
The main thing about Boeing for 2016 is that its earnings will not be as stellar as in 2015 due to some production cuts for some models and potentially weaker demand in some areas, but the prospects are as solid as the company’s order books. Note that last January, Boeing reported EPS of $1.60 (the consensus forecast was $1.35) and BA stock gained about $4.00.
The main catalyst to Boeing’s stock performance in 2016 so far—the company has declined some nine percent year-to-date—was the rumor of a Securities and Exchange Commission (SEC) investigation rumor over perceived errors in accounting practices for the 787, which has fizzled out. The layoff of 4,000 employees in Seattle also did not help.
Boeing has recovered nicely since February and its basic premise—an overflowing order book—has not changed.