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Bear of the Day: Boeing (BA)

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Boeing (BA - Free Report) shares have held up relatively well given the potential blows to their huge backlog of orders for the 737 Max.
 
But the stock has fallen into the cellar of the Zacks Rank because analysts keep lowering their earnings estimates. Back in early March before the Ethiopian Airlines flight crashed six minutes after takeoff, killing all 157 passengers and crew aboard, the full-year 2019 EPS consensus was $20.13.
 
Since then, the Zacks consensus has fallen 28% to $14.43, representing a projected 10% decline in earnings from 2018.
 
Meanwhile, the 2020 EPS consensus has dropped only 7% from $23.12 to $21.43. This is due to Boeing having strong demand for other aircraft like the Dreamliner which is at the center of negotiations with China for what could become the largest-ever order for aircraft.
 
According to the South China Morning Post on June 6, referencing sources who asked not to be named as the talks are private, discussions are focused on about 100 twin-aisle jets in a deal that could be worth $30 billion to Boeing.
 
Planes on the negotiating table are 787 Dreamliners and those from the 777-X line, the newest long-range aircraft in Boeing’s line-up, in particular "the 777-9 variant, the planemaker’s costliest jet with a US$442.2 million sticker price, ahead of the model’s expected first flight later this month."
 
Obviously, the fate of this mega deal could rest in the hands of negotiators battling over the much larger tariff standoff between the two countries.
 
Given this mixed outlook, with ongoing 737 Max investigations, order cancellations, and aircraft fixes, let's take a look at the projected profit picture for Boeing. The best visual tool for this is the Zacks proprietary Price & Consensus chart, which plots changes in annual earnings estimates from analysts (lhs) against the stock price...
 
 
As you can see, the earnings growth outlook for Boeing is currently declining but still positive into 2021. This is probably sufficient to attract investors who want to own the world's most important plane maker.
 
I thought shares would fall to stronger long-term support at $300 by now given all this uncertainty. And it's not as if the stock is a value here either trading around 24X this year's EPS. 
 
Here was my view on March 12 as we absorbed the early investigations and company responses...
 
How Much Could This Impact Boeing's Business?
 
Boeing has also responded quickly this week in releasing an important software enhancement and training manual upgrade. Here's how the company described it in their March 11 press release...
 
For the past several months and in the aftermath of Lion Air Flight 610, Boeing has been developing a flight control software enhancement for the 737 MAX, designed to make an already safe aircraft even safer. This includes updates to the Maneuvering Characteristics Augmentation System (MCAS) flight control law, pilot displays, operation manuals and crew training. The enhanced flight control law incorporates angle of attack (AOA) inputs, limits stabilizer trim commands in response to an erroneous angle of attack reading, and provides a limit to the stabilizer command in order to retain elevator authority.
 
The 737 MAX was on course to become Boeing's fast-selling airplane, with over 4,600 on backlog order as of last month. At about $120 million a piece, that would total over $550 billion in sales in less than a decade, according to the expected delivery schedule.
 
And this explains the rapid rise in BA shares since their Jan 30 earnings report to new all-time highs above $440. The stock was suddenly trading at less than 20X forward EPS due to Wall Street analysts raising their estimates to keep up with this growth.
 
For the full-year 2019, Boeing is expected to see sales of over $111 billion, representing 10% annual growth. And profits per share are forecast to hit over $20 for a nearly 26% advance from last year. 
 
Those estimates will now come into question as some air carriers consider changing their orders to another plane, or another fleet altogether. But the stock is down 10% in just two days, back to $375. Long-term investors may want to stay the course. And new investors or traders should be on the watch for coming value opportunities.
 
There is plenty of uncertainty right now for Boeing and its suppliers and partners. While the investigation continues, everyone wants better answers. But those could take time.
 
Aside from Boeing as an investment, what we all want is more certainty about the safety and testing of new aircraft designs and procedures. Air travel has never been safer, regardless of how you measure it.
 
One of my favorite measures is the number of accidents per million flights. In the last decade, that ratio slipped under 1.0 and now it sits near 0.3.
 
And while some will decry too much automation, we wouldn't be here now talking about millions of safe passenger flights without the relentless technology innovation that made them possible.
 
(end of excerpt from my March 12 article)
 
Since then, this year's sales projection has fallen over 10% from $111 billion to $99 billion, representing a -2.2% decline from 2018.
 
Boeing shares will probably be a better buy at some point this year. But as long as the estimates keep coming down, I'm in no hurry to buy them. The Zacks Rank will let us know when it's safe again.
 
Looking for Stocks with Skyrocketing Upside?
 
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