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Boeing Set to Fly High as Tariff Woes Seem Overdone
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The Boeing Company (BA - Free Report) has been one of Wall Street’s favorites. In the past two years, the industrial giant’s shares have jumped nearly 150% from the $130 mark to around $330. However, the favorite trade, of late, has begun to unwind as fears of a full-fledged trade war escalates.
The United States is planning to impose hefty tariffs on a series of Chinese products due to the country’s “illicit trade practices.” China hit back with the announcement of tariffs of up to 25% on 106 American products including airplanes with empty weights between 15,000 kg and 45,000 kg. This naturally sent Boeing’s stock spiralling down more than 10% from the all-time high scaled this year. After all, Boeing has high revenue exposure to China-based customers.
Such bitter tariff talks, however, are overblown as in reality it will affect only a limited number of Boeing jets, while the aerospace giant’s fundamentals remain strong. Here’s a detailed look.
Trade War Fears Overhyped
The tariffs announcement will affect Boeing’s 737-800, 737-700 and 737-900 ER models as their operating empty weights are in the range targeted by China. But, Boeing is aiming to phase out all these models as soon as possible. These models will be replaced by the 737 MAX 8, which flaunts a heavier state-of-the-art engine with an operating empty weight of 45,070 kg. Such a weight will help the model to be just beyond the reach of China’s tariffs. To top it, Boeing’s larger airlines such as the 737 MAX 9 and 737 MAX 10 models will no doubt have operating empty weights above 45,000 kg.
Market pundits also believe that tariffs are only applicable for new orders and won’t impact Boeing’s existing backlog in China. Boeing, in the meanwhile, is constructing a 737-completion centre in Zhoushan, where almost 100 planes will be delivered to Chinese customers annually. Completing such aircraft in China will surely help it to stay away from the purview of tariffs. But, the big takeaway is that China’s fleet has around 3,000+ aircraft. This fleet size remains insufficient considering China’s ballooning population. Thus, tariff talks may have dented Boeing’s stock for the time being, but underlying demand signals higher production in the long run.
Fundamentals Remains Solid
Fundamentals in the Boeing’s core airline market are strong. First and foremost, the economy is growing at a steady pace both at home and abroad, while consumers remain optimistic about their financial well-being. Both of these provide enough tailwind for Boeing’s business.
Second, Boeing is a big gainer from the tax overhaul policy. The latest tax law was a massive tax relief for the company as it will now be paying between 8% and 15.5% instead of the earlier 35% for bringing back money held overseas.
Third, international tensions are rising, if we look at North Korea, Russia and China. This is compelling many countries to bump up their defence spending. With military outlays on the rise, we are looking for a streak of growth years ahead for Boeing.
Boeing Stock Verdict
Boeing’s fundamentals remain strong amid elevated trade tensions. The company may lose some business in China, but, beyond that the growth narrative remains impressive. Moreover, trade concerns are just an isolated case and there is much ado about nothing. Especially, when the company’s expected earnings growth rate for the current year is a solid 16.7%, and 13.8% compounded annually over the next five years. In fact, the company’s projected earnings growth rate for the current quarter is 26.9%, whereas the industry is expected to decline 6.2%.
To top it, investors have seen four earnings estimates move higher, compared with none lower, at least when looking at the current year time frame. And the consensus estimate for Boeing has trended upward over the past 60 days, as estimates have risen from $13.59/share two months ago to $14.05/share right now.
And if you are a growth investor then you should definitely bet on Boeing. It has an average trailing 12-month P/E ratio of 27, which is above the industry’s average of 24.68. This higher P/E ratio means that investors are anticipating higher growth compared to peers.
Zacks Editor-in-Chief Goes ""All In"" on This Stock
Full disclosure, Kevin Matras now has more of his own money in one particular stock than in any other. He believes in its short-term profit potential and also in its prospects to more than double by 2019. Today he reveals and explains his surprising move in a new Special Report.
Image: Bigstock
Boeing Set to Fly High as Tariff Woes Seem Overdone
The Boeing Company (BA - Free Report) has been one of Wall Street’s favorites. In the past two years, the industrial giant’s shares have jumped nearly 150% from the $130 mark to around $330. However, the favorite trade, of late, has begun to unwind as fears of a full-fledged trade war escalates.
The United States is planning to impose hefty tariffs on a series of Chinese products due to the country’s “illicit trade practices.” China hit back with the announcement of tariffs of up to 25% on 106 American products including airplanes with empty weights between 15,000 kg and 45,000 kg. This naturally sent Boeing’s stock spiralling down more than 10% from the all-time high scaled this year. After all, Boeing has high revenue exposure to China-based customers.
Such bitter tariff talks, however, are overblown as in reality it will affect only a limited number of Boeing jets, while the aerospace giant’s fundamentals remain strong. Here’s a detailed look.
Trade War Fears Overhyped
The tariffs announcement will affect Boeing’s 737-800, 737-700 and 737-900 ER models as their operating empty weights are in the range targeted by China. But, Boeing is aiming to phase out all these models as soon as possible. These models will be replaced by the 737 MAX 8, which flaunts a heavier state-of-the-art engine with an operating empty weight of 45,070 kg. Such a weight will help the model to be just beyond the reach of China’s tariffs. To top it, Boeing’s larger airlines such as the 737 MAX 9 and 737 MAX 10 models will no doubt have operating empty weights above 45,000 kg.
Market pundits also believe that tariffs are only applicable for new orders and won’t impact Boeing’s existing backlog in China. Boeing, in the meanwhile, is constructing a 737-completion centre in Zhoushan, where almost 100 planes will be delivered to Chinese customers annually. Completing such aircraft in China will surely help it to stay away from the purview of tariffs. But, the big takeaway is that China’s fleet has around 3,000+ aircraft. This fleet size remains insufficient considering China’s ballooning population. Thus, tariff talks may have dented Boeing’s stock for the time being, but underlying demand signals higher production in the long run.
Fundamentals Remains Solid
Fundamentals in the Boeing’s core airline market are strong. First and foremost, the economy is growing at a steady pace both at home and abroad, while consumers remain optimistic about their financial well-being. Both of these provide enough tailwind for Boeing’s business.
Second, Boeing is a big gainer from the tax overhaul policy. The latest tax law was a massive tax relief for the company as it will now be paying between 8% and 15.5% instead of the earlier 35% for bringing back money held overseas.
Third, international tensions are rising, if we look at North Korea, Russia and China. This is compelling many countries to bump up their defence spending. With military outlays on the rise, we are looking for a streak of growth years ahead for Boeing.
Boeing Stock Verdict
Boeing’s fundamentals remain strong amid elevated trade tensions. The company may lose some business in China, but, beyond that the growth narrative remains impressive. Moreover, trade concerns are just an isolated case and there is much ado about nothing. Especially, when the company’s expected earnings growth rate for the current year is a solid 16.7%, and 13.8% compounded annually over the next five years. In fact, the company’s projected earnings growth rate for the current quarter is 26.9%, whereas the industry is expected to decline 6.2%.
To top it, investors have seen four earnings estimates move higher, compared with none lower, at least when looking at the current year time frame. And the consensus estimate for Boeing has trended upward over the past 60 days, as estimates have risen from $13.59/share two months ago to $14.05/share right now.
And if you are a growth investor then you should definitely bet on Boeing. It has an average trailing 12-month P/E ratio of 27, which is above the industry’s average of 24.68. This higher P/E ratio means that investors are anticipating higher growth compared to peers.
If this wasn’t enough, Boeing flaunts a Zacks Rank #2 (Buy) and a Growth Style Score of A, which offers the best investment opportunities in the growth investing space, per our research. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Zacks Editor-in-Chief Goes ""All In"" on This Stock
Full disclosure, Kevin Matras now has more of his own money in one particular stock than in any other. He believes in its short-term profit potential and also in its prospects to more than double by 2019. Today he reveals and explains his surprising move in a new Special Report.
Download it free >>