Boeing BA shares lost 4.11% on Dec 18 following Wells Fargo's downgrade from Outperform to Market Perform. The primary reasons behind the downward revision were lower expected guidance and risks going into 2016.
Wells Fargo analyst Sam Pearlstein believes that the aerospace giant’s risk-reward profile is less favorable heading into fiscal 2016. The analyst added that the company’s initial guidance for 2016 will likely fall short of expectations offsetting the favorable cash generation portfolio. The analyst further believes that low price escalation for the company's commercial aircraft is affecting its stock performance.
According to Wells Fargo, investors should be cautious of risks like a probable 777 rate cut, weak 747 demand, lower oil prices, higher interest rates and lower medium-term defense revenue growth compared to its peers.
Boeing has delivered 709 airplanes by the end of Nov 2015 with an average monthly production of 64 planes year to date. The company expects 2015 commercial airplane deliveries in the band of 755−760.
Though Wells Fargo has its reasons for the downgrade, Boeing is in all likelihood set for securing maximum orders before the year is out. It nabbed business worth $11 billion for the 737 family within a week. The company won three 737-800 orders from UK-based Jet2.com in a deal valued at $288 million. The airline had already placed 27 plane orders earlier, bringing the total number to 30 planes.
Boeing also received a major order, worth $8.38 billion, from China Southern Airlines for 50 737 Max and 30 Next-Generation 737. Moreover, it clinched an order from Delta Air Lines, Inc. DAL for 20 737-900ER With this order, Delta’s Boeing fleet will touch 120 by 2019.
Boeing is the largest aircraft manufacturer in the world in terms of revenue, orders and deliveries, and one of the largest aerospace and defense contractors. Its revenue exposure is spread across more than 90 countries around the globe. Demand for Boeing’s commercial airplanes is on the rise due to a steady improvement in passenger and freight traffic on the back of a recovering global economy.
The company’s strong fundamentals and solid balance sheet and cash flows provide financial flexibility in matters of incremental dividend, ongoing share repurchases and earnings accretive acquisitions. Boeing’s diversified revenue stream provides steady earnings leading to strong cash flows. During the third quarter, its operating cash flow (before pension contributions) increased 72% year over year and free cash flow was up by a significant 625%.
Recently, the company also hiked its quarterly dividend by 20% and raised its stock-repurchase plan to $14 billion to let investors share the benefits of soaring airliner deliveries. The raised dividend and higher buyback authorization indicate Boeing’s confidence in the commercial market.
The company also holds a favorable Zacks Rank #2 (Buy). A couple of other favorably ranked stocks in the aerospace and defense space are Leidos Holdings, Inc. LDOS, sporting a Zacks Rank #1 (Strong Buy) and General Dynamics Corporation GD, carrying a Zacks Rank #2.
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