Leading aerospace and defense services provider The Boeing Company (BA) operates through four segments: Commercial Airplanes, Defense, Space & Security, Global Services, and Boeing Capital. BA’s stock has gained 68.9% over the past year as the company continues to see robust demand for its commercial, defense, space and services.
However, over the past month, the stock declined slightly. One of BA’s most important customers, Emirates airline, said it may refuse the delivery of 777x jets if they fall short of contractual performance commitments. If that were to happen, the U.S. plane maker could lose a major order in the coming days.
Given investors’ concerns over BA’s 777x deliveries and an unforeseen halt in its supersonic jet co-development plans, the stock might witness a pullback.
Here is what we think could influence BA’s performance in the near term:
Boeing-backed Aerion Supersonic Suffers a Setback
On May 25, NetJets, the world’s largest private jet company, suspended its plans to add Boeing-backed Aerion’s supersonic jets to its fleet. The announcement came after the news that Aerion Supersonic was unable to secure additional funding to finalize the transition of the AS2 aircraft into production. BA is Aerion’s strategic partner and the unexpected halt in operations could negatively impact BA’s business.
On May 24, Emirates airline’s President said he would refuse the delivery of BA’s 777x jets if they fall short of contractual performance commitments. As one of BA’s biggest customers, Emirates airline has ordered 126 777x jets and 30 787s, which are worth more than $50 billion at list prices. However, BA’s new version of its popular 777 series, which was supposed to be delivered on July 2020, has been delayed until 2023.
If BA fails to address the issue, the company’s future dealings with one of its most important customers could be damaged.
BA’s total revenues have declined 10% year-over-year to $15.22 billion in the first quarter, ended March 31, 2020. Furthermore, the company’s loss from operations came in at $83 million. Also, its net loss was $537 million, while its loss per share was $0.92 for this period. BA’s commercial airplanes revenue decreased 31% from its year-ago value to $4.27 billion, driven by lower 787 deliveries. The company’s operating margin was 11.8% compared to 15.3% in the prior-year quarter. The decrease was driven primarily by lower commercial services volume due to COVID-19.
The company’s 0.4% trailing-12-month asset turnover ratio is 48.4% lower than the 0.8% industry average. Also, its trailing-12-month gross profit margin, ROA and ROTC came in at negative 1.4%, 7.9% and 12.7%, respectively.
In terms of forward EV/EBITDA, BA is currently trading at 36.82x, which is 184.4% higher than the 12.94x industry average. And its forward EV/EBIT multiple of 56.15 is 205.5% higher than the 18.38 industry average. Also, the company’s 3.17x trailing-12-month EV/Sales is 45.8% higher than the 2.18x industry average.
Consensus Rating and Price Target Indicate Potential Downside
Of 22 Wall Street analysts that rated the stock, only seven rated it Buy. BA has a $227.05 consensus price target, indicating a 4.4% potential downside. The stock’s price target ranges from a low of $125 to a high of $306.
POWR Ratings Reflect Bleak Prospects
BA has an overall D rating, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. BA has a D grade for Value and Quality. These are reflective of the stock’s premium valuation and low profitability.
Also, it has a C grade for Growth. This is in sync with the company’s weak growth prospects.
In addition to the grades we’ve highlighted, one can check out additional BA ratings for Sentiment, Stability and Momentum here.
Of the 66 stocks in the D-rated Air/Defense Services industry, BA is ranked #63.
There are several top-rated stocks in the same industry. Click here to view them.
Although the decent air travel recovery has helped BA’s stock gain 10.9% year-to-date, the strength of the company’s comeback from the pandemic hinges on its 777x operational crisis. In addition to that, a setback in its Aerion supersonic jet strategic investment could make investors’ nervous about the stock’s prospects. Last, the company’s declining revenues and overvaluation we think make it best avoided now.
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BA shares rose $2.72 (+1.15%) in premarket trading Tuesday. Year-to-date, BA has gained 12.49%, versus a 12.81% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...
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