It has been a hard six weeks for Boeing (BA). The world's largest commercial airplane manufacturer has been besieged by a growing list of malfunctions and mishaps on its brand new Dreamliner 787 and has also now found itself grounded by the FAA until it can find out what the problem is and fix it.
So far, the reaction in the market has been fairly restrained, with shares shedding about 7% over the past week or so. Harsh, sure, but hardly a washout, and it begs the question whether this blue chip member of the Dow Jones Industrials (^DJI) is something that should be sought or shed. For Hank Smith, the chief investment officer at Haverford Trust, it all comes down to two things: whether it is a short or long-term issue and what kind of impact it has on the company's balance sheet.
"Those two issues have to be evaluated as to whether this is a short-term issue the company can overcome, or whether it is a longer term issue which then causes a firm like ours to hesitate and pull away from," Smith says in the attached video.
While Haverford does not currently own a stake in Boeing, Smith says it is in the universe of quality stocks they follow. While there is no way of knowing how long problems will plague this new plane, how quickly the cause can be identified or how costly repairs will be, Smith says so far this issue looks to be short-term in nature and not something that threatens long-term earnings growth or compromises its financial strength.
"You have to factor in if a company's balance sheet is getting compromised because of its difficulties," Smith says, adding that the 787 is only one of many products sold by Boeing, albeit an important one. "Right now we have put this in the category of a short-term problem not the beginning of a long term obstacle, but that could change."
To be fair, Boeing is not the only "blue chip turned cow chip," as Smith characterizes it. In fact, there are three members of the Dow Jones Industrials that are technically in their own private bear markets right now, having fallen more than 20% from their 52-week highs. They are Hewlett Packard (HPQ) -42%, Intel (INTC) -25%, and DuPont (DD) -20%, and Smith says only one of them is on his cow chip list, so to speak.
"We like both DuPont and Intel and see their problems more as short-term headwinds," Smith says, while calling Hewlett Packard's plight one of secular, long-term challenges, as well as management issues.
Specifically, he calls Intel "one of the highest quality companies" in tech and is further encouraged to hang on due to its "tremendous dividend yield" (of 4.1%) which he points out has doubled in five years and is a "tangible sign of strength."
"DuPont is still a secular growth story on the agricultural and biotech side," he says, calling the chemical company's issues ''very short-term" in nature given the slowdown in Europe and the emerging markets.
Out of curiosity, I asked him about another battered blue chip that's not in the Dow. Although shares of Apple (AAPL) are down 28% or $200 billion from their all-time high last September, Smith isn't bailing out. In fact, he calls Apple a ''bargain at 10x earnings, or with cash, 7x," a far cry from the exorbitant valuations the tech sector's leaders have seen in the past.
"We're still patient and more inclined to add at these prices as opposed to exit our position" he says.
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