Why Boeing Shares Skyrocketed

Summary

• Boeing's 15% share price recovery followed after a 7% decline driven by bearish remarks.
• Assembly lines reopening and guidelines to re-open America for business provided fuel for share price appreciation.
• While re-opening for business is a positive, the demand profile remains weak at best without clear timeframes that could provide stimulus to share prices.
• I do much more than just articles at The Aerospace Forum: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

On Friday, the 17th of April, shares of Boeing (NYSE:BA) gained almost 15% vs. the 2%-3% for the markets. On the same day, I published a report outlining the cancellations in Boeing’s latest order book update. It was quite a significant decline, in excess of 300 units (a mix of contractual cancellations and expected future cancellations). However, with Boeing’s share prices surging the obvious remark I received was why Boeing shares were surging. That's a question I will answer in this analysis.

Source: Boeing

Opening Up America Again

What provided a broader impulse to the markets were a set of guidelines for opening up America again. This would be a staged process, which tests whether staging criteria are met at each stage. This phased opening up would happen at the discretion of local authorities. Obviously with many of the things that President Trump proposes it will attract criticism including that from readers on Seeking Alpha. With this being an election year, it's in the president’s interest to resolve the COVID-19 crisis, which would not be a full economic recovery but a sense of recovery in which we pick up our lives again but in a prudent way. It's in the president’s interest for re-election, but also the people, to see this being rolled out in a prudent way.

Source: VOX

There will be expectations on when states can re-open for business as President Trump shared that 29 states could be opening soon, but the most important part of this, whether you agree with President Trump or not, is that the framework to return to normal life (to the extent you can call it normal life) is there. It shows that there's a plan or a timeframe and in uncertain times like these that provides support to the markets. We’ve been seeing outlines for a very slow re-opening in Europe as well and those outlines are generally well received.

Opening up Boeing again

Source: Bizjournals

“Opening Up America” provided support for the stock markets. Boeing outperformed the market, which was eye catching. A 15% surge seems impressive, but we shouldn’t forget that before surging 15% Boeing lost 7% on remarks from United Airlines (UAL) CEO Oscar Munoz and President Scott Kirby that there would be no quick snapback in demand. That hardly is anything new, as I already pointed out in a previous piece that a V-shaped recovery was out of question, but it obviously gets more attention when airline executives say it. With a strong sell one day, we often see a bit of a rebound the next day. So, 15% seems huge, but it's a whole lot smaller when we take into consideration the 7% decline during the previous trading day. Taking this into consideration, from Thursday (when United Airlines showed the dark clouds above the air travel market) to the close on Friday, Boeing shares gained 6.8%. Part of the surge on Friday was there to offset share price declines from the previous days, which were sparked by comments which hardly came as a surprise.

Now we also have the share price driving element that Boeing is opening up again. That news came after hours on Thursday the 16th of April (the day on which Boeing shares lost 7% after the bearish remarks from United). Employees in the Puget Sound for the 737, 747, 767 and 777 will return as early as third shift on April 20 with most returning to work by April 21. Employees for the 787 program will return as early as third shift April 23, with most returning to work by April 24. That news sent shares 4% higher in after-hours trading. What we are seeing is that basically opening or planning to open America as well as Boeing for business again provided a solid footing for Boeing’s 15% price increase in Friday’s session.

A legitimate surge or not?

Having plans to open up is considered good news at this point. My only concern, and it's a grave concern, is whether Boeing shares appreciating by 15% is justified. After all, even with Boeing opening for business again the company is still facing problems.

The first concern we can start with are the customers. Being able to open for business is good, but it doesn’t mean that Boeing restarts the line and the aircraft will be rolling to customers. What we are seeing now is that airlines have started to defer deliveries. So, even if the ability to supply jets is being restored, the ability to take delivery hasn’t really restored. Boeing CEO David Calhoun considers the aid that airlines are receiving a good step that allows Boeing to plan the production system for the medium- and long-term impact on air travel. I’m a bit pessimistic on that note as I don’t believe that the aid airlines are receiving now provides an extremely clear direction on what demand will look like in the medium to long term. We just know that US airlines likely will not go belly up in the coming months, but for other airlines we don’t know, and even for US airlines we do not know how taking loans is going to affect the ability to scale back in the coming months and years.

Apart from that, Calhoun is talking about planning the production system for the impact on air travel and he's talking about maintaining the aviation pillar of the US economy even if that takes years to recover, not months. So, Boeing opening for business is being considered reason enough for Boeing shares to appreciate significantly. If we read remarks from Calhoun, which actually are not any different from the notes from United Airlines executives and my own views, then we can only conclude that demand is significantly eroded and so restarting production likely will not happen at the same scale as prior to the production shutdown and recovery of demand supported production capacities could take years. So, we will see a production restart at reduced rates. 2020 should have been a production recovery year for Boeing, and it does seem like it's going to be even worse than that. That's not something you can reasonably rhyme with higher share prices.

To that you can add that Boeing’s cash position wasn’t rosy before COVID-19 hit and I can assure you it won’t be any prettier when the dust starts to settle after this pandemic. Boeing already was expected to see debt increasing this year, and with a recalibration of production levels, read “lower production,” Boeing will need to raise even more debt either via government-backed loans or loans from the government as final delivery payments are not coming in as expected and the same likely holds for progress payments. The Boeing 737 MAX certification timeline also seems to be delayed by at least another month. So, you could really ask yourself how justified higher share prices are in the light of reduced demand for commercial aircraft. Demand from the defense side remains, so being able to continue work on defense programs is really important to Boeing, but the commercial aircraft business simply doesn’t have a demand profile that supports a strong bounce in aircraft deliveries that Boeing envisioned.

As a shareholder, I can appreciate a 15% increase in share prices but make no mistake: Opening up business doesn’t mean that Boeing is going back to normal. Demand for their commercial aircraft products is well below the previous envisioned production capacity for 2020. The recovery in share prices, in my view, is one with extremely little fundamental support.

Conclusion

Many readers couldn’t quite understand why Boeing shares were trading higher, especially given that I showed the cancellations during the month of March reaching more than 300 units and more to come. What provided support to Boeing’s share prices were scheduled returns to Boeing’s assembly lines and guidelines to open America for business again. In uncertain times like these it, are plans and guidelines like these that provide support to the markets and in this case Boeing’s share prices. At the same time, I think the 15% surge doesn’t fully reflect the fact that at this stage we can’t know what mid- and long-term impacts on demand for aircraft looks like and in the near term Calhoun’s words give a strong indication that production rates will be coming down. So, those definitely aren’t positives. Apart from that, Boeing still is in bad financial shape and COVID-19 is making that worse. Fundamentally, I see extremely little that supports surging share prices. At this point, we are seeing that sentiment is taking over and the market has sold off to the extent that just a tiny bit of what could be perceived as good news can spark share prices melting up. That hardly should come as something new. In March, I discussed the opportunity that Boeing shares provided. The art back then was not pulling the trigger too early. What I warned for back then is that based on the fundamentals or even the technical picture there wasn’t a lot (if anything) supporting an investment case.

What I did point out is was the following:

None of the selling from the past couple of days has been related to the Boeing 737 MAX crisis, so even though I believe that these share price levels are reasonable, we could see Boeing recovering share prices and pulling the market on positive COVID-19 projections.

That's what seems to be happening now with Boeing’s assembly lines re-opening and plans to gradually re-open America state by state. The market priced in the Boeing 737 MAX crisis, but they did so after COVID-19 hit. So, Boeing was pushed to the right trading range for the wrong reason and, as a result, it became the playball of COVID-19 sentiment and projections. Having 7% declines on one day and 15% increases another day are part of that COVID-19 induced volatility and investors should be mindful about that.

A comment on connecting my analyses to day-to-day price action

I have received some remarks that connected the share price movement on the day of publication of the cancellation analysis to the soaring share prices only to conclude that the cancellations are not important or there's something wrong with the analysis. The analysis being published on a day on which Boeing is skyrocketing, however, is pure coincidence. The analysis could have been published on one of the many days on which Boeing was trading down modestly and nobody would connect the analysis to the share price movement or try to do so. The analysis was penned days before Boeing shares went up, so that should serve as a good indication that analyses don’t always need to be connected to day-to-day price movement in share prices. The cancellations for Boeing’s key programs are not day-to-day impacts in the sense that their impact is spread out in time but the analysis is one out of many tiny bits and pieces that complete a full picture of Boeing as a company. Some elements are positive, some are negative, some are focused on the long term, some have a short-term focus and some don’t focus, but it rarely is the case that you can pick a piece I write and connect it to the day-to-day price movements. That's mostly because my work has a focus that stretches beyond a day-to-day timeline.

Disclosure: I am/we are long BA, EADSF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.