Valuentum Exclusive Analysis for the Discerning Investor

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In no, way shape or form should you *now* be interested in Boeing’s stock. Let’s explain.

By Brian Nelson, CFA

I used to cover Boeing (BA) full-time when I worked as a senior equity analyst at Morningstar many moons ago. I remember pounding the table on the name to many a buyside shop in Chicago when it must have been trading well under $100 at the time (now more than 10 years ago). I remember posting an old video of me with Pat Dorsey, who now runs his own shop in Chicago, Dorsey Asset Management. That video used to be here, but as in what usually happens on the Internet, the darn thing doesn’t exist anymore. If someone can track down this video, I’d very much appreciate it.

Anyhow, the story at the time was that Boeing was facing challenges with its 787 Dreamliner development (you know, the mostly composite, point-to-point mid-size wide-body plane), and replacing some of the Eisenhower-era KC-135s with new aerial-refueling tankers (the KC-X). Well, the 787 Dreamliner development was plagued with delay after delay and cost overrun after cost overrun. If I remember correctly, a few of the earliest 787 planes may never have made it to customers as they were so discombobulated (not a technical term). Not only this, but Boeing was facing a scandal with the aerial-refueling tanker contract, too, with a former Boeing executive even going to jail.

Here’s what I’m trying to say. The 737 MAX troubles that are scaring everybody today and the public embarrassment surrounding its Starliner spacecraft is nothing new. The company has been in these types of situations before, and frankly, its financial position has never been stronger. The stark reality is that the 737 program is vital to the air travel industry, Boeing, and its suppliers, and while it may not seem so today, we will see the plane in the air again, even if Boeing renames its workhorse 737 program to distract the public from fear.

Until deliveries and cash flow start flowing again, however, Boeing is sure to feel the pain from 737 MAX delays, but again, this isn’t too unlike the challenges it faced with delays related to its 787 Dreamliner perhaps a decade ago now. Customers were frustrated with the 787 delays and demanded compensation, too, but not many cancelled. The same will be true with the 737 MAX, in my opinion. There’s going to be tons of bad press, and airlines and lessors are going to be angry and demand compensation, but frankly, they *need* this plane (the industry needs this plane). Still, the pain will be felt at Boeing, but again, this isn’t surprising. S&P Global Ratings just placed Boeing’s credit on watch with negative implications.

Now—here’s what I am more worried about. You’re not looking to jump into Boeing as an investor now, are you? For starters, we added Boeing to the Dividend Growth Newsletter portfolio January 27, 2017--and removed it March 16, 2018--that’s almost two years ago now! During that hypothetical holding period, the stock’s return trounced the return of the S&P 500 by a factor of roughly five times, doubling over this time period. Since May 2018, our fair value estimate for Boeing has hovered around $300-$330, with the stock surging to nearly $450 in early 2019. If one didn’t consider unloading shares back in March 2018 or in early 2019 (upon its breakdown), well above the high end of our fair value estimate, what the heck can we say at this point?

Remember--we can't tell you to do anything. We're a financial publisher. Today, Boeing's stock has been pummeled to ~$320 per share (showcasing the benefits of fair value analysis and illustrating price-to-fair value estimate convergence), still about in-line with our fair value estimate, but shares have been going down considerably. Said another way, the stock is fairly valued with negative momentum, hardly an undervalued stock with strong momentum that we’re looking for on the long side. Not only this, but it’s still likely we may see more delays before the 737 MAX returns to service and an even more-leveraged balance sheet and weakened credit ratings, as well as market share bleed to Airbus (EADSY) when Boeing emerges from this debacle.

Darnit—why in the world are you *now* interested in this name? Short of the board cutting its dividend, Boeing is about as far away from anything that we could be interested in right now. Sure, the company will get through its current troubles, as it always has (as in the case of 9-11, SARS, war, etc), but there are so many other easier names on the market that one can consider. Look at our newsletter portfolios. Why get bogged down on this one, a stock in the "too-hard" bucket, when one could be equally right or wrong, on either the upside or downside?

Concluding Thoughts

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 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. We beat the market in 2019 for a reason, gosh darnit, and it’s not because we like talking about potentially falling knives. We kept you out of the quant winter, too, for goodness sake.

How’s that for direct and to-the-point? Now go talk about it.

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

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

Related: JETS (and top holdings within)

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Brian Nelson does not own shares in any of the securities mentioned above. Some of the other companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.