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Boeing Down 15%, Turbulence Still Ahead

publication date: Mar 11, 2020
 | 
author/source: Brian Nelson, CFA

Image: Boeing's shares have faced a perfect storm of negatives. We're still not interested.

By Brian Nelson, CFA

I couldn’t have told you in any clearer terms in our January 23 note about my thoughts on Boeing, “Why *NOW* Do You Care About Boeing’s Stock” -- “In no, way shape or form should you *now* (January 23) be interested in Boeing’s stock.” Here were my concluding thoughts in that note:

I’ve written about working on resetting investors’ mental models, and getting investors to use our research in a forward-looking capacity. What I’m saying is that now (January 23) is not the time to evaluate our work on Boeing. Many months ago was the time to have had the Boeing “conversation.”

If you ignored the stock’s doubling in the Dividend Growth Newsletter portfolio during much of 2017 and into 2018, and you ignored the stock’s overvaluation coupled with negative momentum as it collapsed in early 2019 (as a time to dump shares), why are you *now* paying attention? The name is but a fairly-valued idea with negative share-price momentum.

The time to have evaluated Boeing was when we added it to the Dividend Growth Newsletter portfolio in January 2017 (and then removed it in March 2018), and when the stock collapsed from all-time highs in early 2019. Unless you’re interested in taking chances on catching falling knives, hardly anybody should be interested in Boeing right here (even if it pops on a relief rally).

For those paying attention, you know we won’t like Boeing until shares start to trade near the lower end of our fair value estimate range on improving momentum. That simply won’t be for some time yet, if at all. Boeing is not a part of the newsletter portfolios.

During the trading session March 11, Boeing’s shares have collapsed below $200, trading off about 15%. The aerospace giant announced that it will fully drawdown its $13.8 billion term loan (as credit markets tighten) and that it registered a net loss of 28 orders during the month of February. Things are not looking good, and the company even halted hiring due to a perceived “cash crunch.” Boeing’s airline customers are in pain (travel demand is slowing as a result of COVID-19) and the continued problems with the 737 MAX have combined to create a whirlwind of hurt for the aircraft maker.

Concluding Thoughts

As you know, we’re *STILL* not in the business of catching falling knives, and we won’t be interested in Boeing’s shares until they have sustainably turned the corner higher. As we said in January, a sustainable turn higher won’t be for some time yet, in our view. We wouldn’t be surprised in the coming quarters if Boeing’s credit rating is cut again (Moody's recently downgraded Boeing's senior debt to Baa1 from A3, and the rating firm noted that the "ratings remain on review for downgrade"), and Boeing eventually has to cut its dividend. Upon the next report update, we expect a substantial reduction to our fair value estimate and the once-healthy 1.9 Dividend Cushion ratio (to below 1), given expectations for additional debt and reduced free cash flow forecasts.

Aerospace & Defense - Prime: BA, FLIR, GD, LMT, NOC, RTN

Aerospace Suppliers: ATRO, HEI, HXL, SPR, TDY, TXT

Conglomerates: DHR, GE, HON, MMM, UTX

Related: JETS, XAR, ITA, DIA, PPA, FIDU, VIS

Related airline equities: AAL, ALK, DAL, HA, JBLU, LUV, SAVE, UAL

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