Until the recent plane crash, Boeing (NYSE:BA) stock had been on fire. BA rose by about 52% between Dec. 24 and March 1. Despite record production, its backlog continues to grow, and the company continues to benefit from increases in defense spending. However, with the second crash of a Boeing 737 MAX 8 plane in less than five months, the air of invincibility has left the stock.
The problem has worsened as China, Indonesia and several airlines have grounded the Max 8 until further notice. Moreover, digging deeper into the numbers, other concerns have appeared that could hurt shorter-term traders.
Given these numerous factors, Boeing stock looks precarious. But, until the second plane crash, I saw little to dislike about BA. The company found itself earning more business than it can currently handle. Boeing announced a record 806 deliveries for 2018. However, the company took 893 orders. Despite production increases, it will now take seven years to complete current orders.
Also, with the Trump administration’s push to spend more on the military, its defense contracting side is booming. Last September, the Pentagon awarded $13.7 billion in contracts to Boeing. Moreover, while it has little exposure to the growing smaller jet market, it’s working with Embraer (NYSE:ERJ) to develop such an aircraft. Even if budget cuts or a downturn dampens demand, Boeing workers will have plenty of work for years to come.
Multiples Nearing Historic Highs
Considering the orders received, the 22 price-earnings (PE) ratio may not seem unusual. It may even appear reasonable with the predicted 21.8% average annual profit growth rate. Furthermore, dividend payouts have risen for seven straight years. The current 1.95% yield may not attract a lot of income-focused investors. Still, longer-term holders will benefit from the dividend increases.
However, BA had steadily fallen during March even before the Ethiopian Airlines crash. Now with doubts about the safety of the 737 Max 8, one now has to wonder how the cloud over this plane will affect shares of Boeing. Either way, the strain on Boeing stock will likely persist for some time.
Moreover, Boeing’s balance sheet shows two significant concerns. One involves the pension shortfall. Among large U.S. corporations, only GE (NYSE:GE) lags Boeing in underfunding pensions. BA holds over $19.9 billion in pension liabilities as of the end of 2018. However, that has come down from $25.86 billion in liability the company faced just two years ago.
The company also plans to allocate $1.1 billion to pensions this year. The company earned $10.45 billion in 2018 and generated $13.53 billion in free cash flow. For these reasons, I think BA can bear this enormous expense, but it poses a significant liability.
Further, share buybacks have begun to place an enormous strain on the balance sheet. Thanks to spending on share repurchases, Boeing has become a $239 billion company with only $339 million in stockholders’ equity. This means BA trades at an astronomical 661 times book value. Also, with the tiny amount of equity, it calls into question how much the company can afford to spend on buybacks in future years.
Bottom Line on BA Stock
The increasing backlog of orders, the military contracts and the move into smaller jets had worked in Boeing’s favor before the recent plane crash. However, issues with the Max 8 may lead to some order cancellations. Moreover, the company still faces substantial pension liabilities and challenges related to its balance sheet.
I still think long-time investors should remain in BA stock, however. But I see enough negatives to not buy until BA hits rock bottom. Between the Max 8 issues, the massive rise in the stock price and the balance sheet concerns, BA will continue to pull back over the near term. If it turns out that Boeing’s best-selling Max 8s are, in fact, defective, then Boeing stock has much further to crater.
As it stands, Boeing remains well-positioned to weather its challenges and deliver long-term returns. American Airlines (NYSE:AAL) and Southwest Airlines (NYSE:LUV), both among Boeing’s biggest customers, have stated their intent to continue flying the Max 8s. In a strange way, the doubts surrounding the 737 Max 8 may eventually lead to a buying opportunity. Now is not that time, and in the near term, Boeing stock is headed for lower altitudes.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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