While the S&P 500 gained 0.10% on Monday, Boeing (NYSE:BA), one of its most embattled constituents, lost more than 4% on the day with Boeing stock closing at under $375.
Two things happened Monday to put a damper on Boeing.
First, Bank of America Merrill Lynch cut its rating on Boeing from buy to neutral. Second, investors were still freaking out after the company said that it would slow the production of the 737 to 42 aircraft a month starting in mid-April.
If you own BA stock, you knew both of these events would come to pass.
Analysts Get Paid to Analyze
Analysts are reactive. If something bad happens, they have to redo their financial models to account for the potential headwinds to revenues and earnings. There will likely be more of them before the 737 Max 8 is cleared to fly.
As for slowing production, there’s not much sense in going full-tilt on a plane’s production schedule until you know how much of your backlog is still in the pipeline. It’s already lost orders, and there will likely be more losses in the coming weeks.
In March, Bank of America (NYSE:BAC) analyst Ken Hoexter recommended that FedEx (NYSE:FDX) should slow its purchase of Boeing 767s and 777s to conserve cash, plowing the savings into share repurchases.
“Given the share price decline at FDX, we believe it may look to reduce capex to increase its planned buyback. The company could discuss such a plan when it reports on Tuesday,” Hoexter wrote in a note to clients Mar. 18.
To see analysts recommending reduced purchases of planes other than the 737 ought to be a horrifying thought to Boeing shareholders. The last thing it needs at this point is a mass exodus from other Boeing aircraft.
If this were to happen in earnest, Boeing would likely be affected, because it would leave investors with little hope for the future. So far, there’s no indication that FedEx is going to slow its Boeing orders.
Remember Why You Own Boeing Stock
I read somewhere that if you can’t explain in a single sentence why you own a particular stock, you shouldn’t own it.
I believe investors should own Boeing stock because it makes the best planes on the planet generating vast amounts of free cash flow in the process.
That sentence says a lot about Boeing.
It says the company cares about the kind of planes it produces. It says the company wants to make planes as efficiently as it can so that it generates higher profits for shareholders. And finally, it says the company cares about keeping its balance sheet sound by generating gobs of free cash flow to pay down the debt required to build these expensive planes.
It says all that in one sentence of 26 words and 149 characters.
Before I answer the question of whether things are going to get worse for Boeing, I’d like shareholders reading this to write out (in one sentence) why you own Boeing stock. It will help you get through this last piece.
Are Things Going to Get Worse?
Of course, they are.
Since the Ethiopian Airlines crash, I’ve written two articles about the company, both positive.
The last piece I called Boeing a superior stock to Airbus (OTCMKTS:EADSY) because of its cash flow generation. Also, I feel that the significant test CEO Dennis Muilenburg and his team is currently facing will make Boeing a stronger company in the long run.
I wrote a pieceBefore the Ethiopia crash about the 7 Reasons You Want Boeing Stock in Your Portfolio. I have no hesitation recommending this stock over the long haul.
However, the crisis it’s facing has a long way to go before it’s over. Lawsuits, hearings, testing, discussions with customers, nervous passengers, etc. Currently trading 28% above its 52-week low of $292.47, any further bad news will most certainly send its stock spiraling toward $300 or lower.
Now is not the time to be guessing about the future.
Has it bottomed? I don’t think so.
When will we know it’s bottomed? When the 737 Max is back flying and enough time has passed to allow investors to forget what’s happened over the past six months.
So, yes, I do believe that things are likely to get worse before they get better.
The Bottom Line
That said, if you’re like me and can explain in a sentence why it makes sense to own Boeing stock, you’ll gladly buy some more below $300.
But it will be a bumpy ride.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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