Boeing Co. (BA) has been making plenty of headlines lately based on the multiple issues that have recently surfaced on its highly anticipated 787 Dreamliner. This new fuel efficient airliner encountered long delays in delivery due to production and other issues. This disappointed some major customers who had ordered the plane. Now it appears that maybe the Dreamliner needed more time in quality control tests before being delivered because things have not gone smoothly in recent weeks. The Federal Aviation Administration or "FAA" now plans to review the 787's power system, and some major airlines are also reviewing the recent problems.
You would think that Boeing shares would be trading closer to 52-week lows with all the bad news on the Dreamliner, but the stock is actually trading over $77, just barely below the 52-week high of $78.02. That seems to be cause for concern as it shows some real complacency on the part of investors. While it's likely that Boeing will eventually work through these issues, investors seem to be completely discounting the potential for more negative headlines, further action from the FAA, the potential for order cancellations, or at least reduced future demand for this key aircraft. If I were running a major airline, I would surely be thinking twice about placing a new order for the 787 right now.
Investors seem to be so prepared to buy on a bad news headline, that they are not even waiting for the stock to drop. As such, it appears to be a great opportunity to sell the stock now, not just for the quality issues that have surfaced for the 787, but also for the additional reasons below:
1) Analysts expect Boeing to earn about $5.01 per share in 2012 and $5.12 per share in 2013. First of all, that puts the price-to-earnings ratio at around 15.5 times, which is at a premium to the rest of the market since the average stock in the S&P 500 Index (SPY) trades for about 14 times earnings. Furthermore, earnings are basically expected to be flat in terms of growth for 2013. It's hard to see why investors are paying an above-average multiple for a company with potentially flat earnings and a major issue with a key new product.
2) Boeing's engineering union is in contract talks, and not long ago, Ray Goforth, the executive director of the Society of Engineering Employees in Aerospace Union stated: "I think there is a very high chance of a strike." This strike could come in February and it might be very disruptive. Boeing experienced one of the largest white collar strikes in February 2000, when this same union had its members walk off the job. Furthermore, a recent article indicates that the union leaders feel the sides are still far apart.
3) The Fiscal Cliff scenario might have been averted for now, but that does not mean that big defense budget cuts cannot still occur when the debt ceiling debate likely surfaces in the next few weeks. Many believe that the spending cuts that were postponed under the recent Fiscal Cliff deal will be put back on the table when the nation hits its borrowing limits in just weeks. Boeing is planning ahead for possibly painful cuts in defense spending and in November it announced major layoffs in its defense division. But if cuts are more drastic than expected, that could be just one more reason why this stock should probably not be trading near 52-week highs.
If that weren't enough, it's worth considering that the S&P 500 Index has now rallied to five-year highs. The market appears to be overbought, and with many upcoming challenges looming for the leaders in Washington, it seems to be a wise time to take some chips off the table and wait for better buying opportunities in this and other stocks.
Here are some key points for BA:
Current share price: $77.09
The 52-week range is $66.82 to $78.02
Earnings estimates for 2012: $5.01 per share
Earnings estimates for 2013: $5.12 per share
Annual dividend: $1.94, which yields 2.6%
Data sourced from Yahoo Finance. No guarantees or representations
Disclaimer: Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.