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Summary

  • Investors took profits as bad news hit the shares from all sides.
  • An analyst downgrade, a huge order cancellation at Airbus and warning from Lufthansa added to the momentum.
  • Shares continue to offer appeal for long-term investors when bought on significant dips.

Shares of Boeing (NYSE:BA) fell on Wednesday after bad news hit the company from all sides. The company saw its shares being downgraded by RBC. Furthermore German-based Lufthansa warned about its earnings while major competitor Airbus suffered from a large order cancellation.

Despite these short-term headwinds, shares offer long-term value on significant dips for long-term investors.

Royal Bank of Canada's Downgrade

RBC's Robert Stallard cut Boeing from outperform to sector perform after three years of record orders. He furthermore notes that Boeing has communicated production increases for the remainder of the decade and sees no new product launches.

After an 81% increase in its shares during 2014, the valuation is moving towards the top of the aerospace group at 18.2 times 2015's expected earnings. Stallard notes that the stock is fairly valued and the company has become an execution/cash deployment story more than a growth story.

Airbus Sees A Big Order Cancellation

The other big news event weighing on the sentiment was the cancellation of Emirates for the order of 70 A350s which carried an original list value of $16 billion. The cancellation took many by surprise, cutting 9% of Airbus's (OTCPK:EADSF) backlog for the plane. Originally, Emirates expected to see its first deliveries for the plane in 2019. The cancellations have resulted in some industry-wide worries about future demand and the growth pace of the airline industry.

Airbus stressed that it was disappointing to see its second largest customer run away but noted that flight tests were on track. The company furthermore sees no immediate financial impact while it reassures that there will not be production holes as a result of this move. Shares of Airbus lost 3.1% on Wednesday's trading day as a result of the news.

And There Are The Germans

On top of that came the big profit warning from Lufthansa (OTCQX:DLAKY), with the German carrier blaming the strong euro, strikes and increased competition for negative profit developments.

As a result operating earnings for this year are seen around a billion euro, while it previously anticipated earnings to come in between 1.3 and 1.5 billion euro.

The company furthermore cut its 2015 earnings outlook quite aggressively as well. The cut dragged along shares of other airlines in Europe and the US, while shares of Lufthansa were of course hit the hardest. Its shares fell by double-digit percentages in trading on the Frankfurt stock exchange.

Takeaway For Investors

Back at the start of May, I checked out Boeing's prospects when shares were trading around $129. I praised the company for the huge backlog and strength in this commercial business, the strong balance sheet and increased payouts to investors.

However even at $129 per share, shares were trading at roughly 19 times earnings for 2014 which is not very cheap despite the huge backlog. However, cash flows should be very appealing in the medium term as capital expenditures will see a cyclical downturn while operating cash flows should increase on the back of higher production.

I stressed and continue to believe that Boeing is a decent long-term investment for those with a long-term horizon. That being said, I continue to reiterate that one does not invest in Boeing for a quick profit as 2013's impressive momentum already reflects a great deal of optimism. As a matter of fact, shares have risen throughout the month of May and start of June and are actually trading around $134. This is roughly $5 per share higher compared to when I wrote the article about 6 weeks ago, even after Wednesday's correction.

I reiterate my stance. I am a long-term buyer on significant dips around $120-$125 per share as witnessed in the month of February until April.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Source: Boeing - Investors Take Profits After Bad News Hits, Long-Term Appeal Remains On Dips