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No matter how big an order Boeing (NYSE:BA) announces, the stock hardly goes up. The stock is down 4% for the year, despite having a much more successful Airshow than Airbus this July, having announced 724 firm orders of its 737 fuel efficient MAX Series, and having earnings visibility for the next two decades. The main reason lies behind the same notion that Qineqt has been pressing on for some while; the stocks of manufacturing companies are punished if they do not produce at the rate at which they have to fulfill orders, and therefore, have to pay for lawsuits, case in point being the fact that Boeing has been sued by Air India for not delivering its 27 Dreamliners on time. Therefore, the stock moves up considerably when production-related issues are addressed or Boeing's planes are delivered.

The recent news of rising tensions between Boeing and its technical workers has taken over the headlines, as this will directly impact the production rates.

Boeing issued a four-year contract offer, which would give a pay rise of 3.5% to the company's employees on an annual basis. However, the workers rejected the offer on the basis that the figure was below the current 5% annual rise that Boeing had been giving historically. Also, the workers were agitated by the fact that healthcare costs were raised in the contract, and Boeing had given itself the liberty to change contract terms even after it they had been accepted by the workforce.

According to the Society of Professional Engineering Employees in Aerospace (SPEEA), only 72 percent of the total employees participated in the voting. Out of those, only 608 employees accepted the offer, while 15,097 rejected it.

Before the voting process started, Boeing and the union had already decided that should the new contract offer be declined by the workforce, both bodies would sit down today to decide the way forward.

The contract expires on October 6. Boeing has said that in case both parties do not reach a conclusion till October 6, the contract will stand terminated on November 25, since the SPEEA has filed a 60-day termination notice period.

A strike, which will require another round of voting, is considered to be an unlikely outcome by both the union and Boeing. Employees have been frustrated by the fact that it has been such a successful year for Boeing, but the efforts of the workforce have not been recognized and rewarded. Boeing, on the other hand, points to the fact that the global economy is hardly picking up, and therefore, orders have not been up to expectations. In the Airshow held this July, Boeing announced that it targeted a sale of 1,000 737 MAX series. YTD, Boeing is still short of 276 planes, after Brazilian Airlines Gol Linhas ordered 60 new 737 MAX series jets worth $6 billion, to be delivered in 2018.

Given a backlog of 4,057 jets, and plans to ramp up its production capacity, Boeing cannot afford any sort of production disruption. Boeing has the alternative of distributing its engineering work to suppliers or foreign engineers. However, the company has already suffered from this tactic, as foreign workers did not coordinate well with other engineering groups, leading to defective key pieces like wings that had to be re-engineered in order to be used in the final product.

In case the negotiations do not work, deliveries will be late and the stock will be punished accordingly. In case Boeing decides to raise pays in favor of the employees, operating costs will go up, leading to lower profits. However, investors have some good news since 40% of Boeing's engineers will be eligible to retire in the next five years. This means that the average wage rate will be pushed down, as more experienced workers are paid more.

Conclusion

The company has no debt issues. The stock is trading at a forward multiple of 13x. It also pays a dividend yield of 2.5%. The stock is expected to climb up as the company displays its ability to produce according to demand. The result of the negotiations before October 6 will be an important catalyst for the stock.

Source: Buy Boeing Despite Tensions With Workers