By Minghe Hu
Wall Street expects the stock performance of Boeing Co. will overcome the turbulence of trade war with China because of strong market demand, although its stock price shows that investors have concerns.
The Chicago-based airplane behemoth is one of the largest commercial aircraft makers and defense contractors in the world. Its products include the narrow-body 737 family, the wide-body 787 family and KC-46 and Apache military aircraft.
Boeing’s revenue from China last year was $12 billion, compared with $10 billion in 2016. China accounted for 13 percent of Boeing’s total revenue in 2017. Last year, around 25 percent of Boeing’s aircraft were delivered to China. China will account for an average of 20 percent of Boeing’s annual deliveries each year over the next two decades, according to an April 4 note published by analyst Jeff Windau at Edward Jones.
On April 4, the Chinese government proposed a 25 percent tax on aircraft with an empty weight of 15,000kg to 45,000kg, including the 737 Next Generation airlines.
“Because the older 737 is nearing the end of production and wide-bodies are excluded, the tariff seems symbolic and likely a negotiating tactic,” wrote Chris Higgins, an analyst with Morningstar Equity Research, in a note published on April 4. He has a hold rating and $292 of 52-week price target.
Higgins added China is targeting aircraft, the product that Chinese airlines have a high demand for, indicating that the dispute is getting tense.
Among 30 analysts who follow Boeing, 17 of them have a buy rating on the stock and 13 have a hold rating, according to Bloomberg. The 52-week price target is $387.07, according to Bloomberg. The stock closed at $329.06 on Tuesday. The stock’s 52-week range is $175.62 on April 13 and $362.64 on February 27.
“The Boeing’s stock is going higher. I think the stock is definitely going to the highest $300 range,” said Tigress Financial Partners analyst Ivan Feinseth, who has a buy rating on the stock but doesn’t have a 52-week price target for the stock.
Boeing announced a strong performance in January for its quarter ended Dec 31. Net income soared to $3.1 billion, or $5.18 per diluted share, from $1.6 billion, or $2.59 per diluted share a year earlier, exceeding Wall Street’s expectation of $2.89 per diluted share. Revenue increased 9 percent to $25.37 billion from $23.28 billion, reflecting a record 763 commercial deliveries in 2017, up from 748 in 2016.
Edward Jones analyst Windau, who has a buy rating but no 52-week price target, said the potential increases of material prices caused by trade tensions would raise costs for Boeing, as steel and aluminum are the materials used for its production.
Windau said the increased production of the 737 MAX, which is the successor for the 737 program, will generate cash for the company and is the primary driver for Boeing’s stock because the higher delivery volumes enable Boeing to get a lower price on machine parts and assemblies from its suppliers.
The ramp up of 737 MAX series, increased from 47 units to 52 units a month in 2018, will increase to 57 units a month in 2019, said CEO Dennis Muilenburg in the fourth quarter conference call.
The higher 737 series production will add $1 billion in the company’s pretax earnings, and it is driving growth for the company beyond 2020, wrote Seth M. Seifman at JPMorgan in a note published on Jan. 31 with a buy rating and of 52-week price target of $400.
Boeing reported a backlog of $488 billion January, which represents about seven years of production, including a record 5,864 units of commercial aircraft.
The future product 777X, the largest twin-engine jet in the world, will also attract orders for the company. Although the first scheduled deliveries will be in 2020, Boeing already has 340 orders for the 777X program.
“The trajectory of 777 cash flow is a wild card with 777X to enter service in 2020. The program should be a use of cash very early in the 2020s, and the improvement will be important,” wrote Seifman.
Feinseth at Tigress Financial Partners said the strong commercial airplane demand would skyrocket Boeing’s stock in 12 to 24 months.
Driven by global economic growth, passenger traffic this year is estimated to grow around 6 percent, adding about 200 million passengers to the market, according to the Boeing’s presentation of the fourth quarter earnings call. At the same time, the number of 737 MAX planes being produced is far below the demand.
“Well, to illustrate how strong the demand is, if you wanted a Boeing 737 Max today, I couldn’t deliver you one until 2023,” said Randy Tinseth, the vice president of marketing for Boeing Commercial Airplanes, in Bank of America Merrill Lynch Global Industrials Conference on March 20.