Be careful with this high-profile stock

11th May 2022 07:41

by Rodney Hobson from interactive investor

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He called this trade right, and our overseas investing expert has another warning for shareholders in this Dow Jones constituent, or those tempted to buy.

Shares in aircraft manufacturer Boeing Co (NYSE:BA) have slumped over 20% in the past three weeks and 40% in the past 12 months. It would be wrong, however, to hope that the worst is over.

Figures for the first three months of this year were pretty dire even by Boeing’s recent standards, with revenue falling 8.1% to $14 billion and losses tripling to $1.6 billion compared with the first quarter last year. Analysts had actually expected revenue to rise to $16 billion.

To add insult to injury, the conflict in Ukraine knocked $212 million off pre-tax profits after operations in Moscow, including the supply of parts, maintenance and technical support for Russian airlines, were suspended and the office in Kyiv was temporarily closed. Russian flag carrier Aeroflot flies Boeing 737 and 777 aircraft.

Another $1.5 billion has been set aside to cover continuing delays in production of the 777-9 commercial jet on which so many hopes ride. Major problems have persisted since manufacturing flaws were uncovered nearly two years ago and deliveries were stopped 12 months ago. Production will now be suspended until at least the end of next year and delivery of the first plane has been delayed until 2025.

It is hard to find any comfort in the latest update. Revenue from the defence, space and security arm, which shareholders might have hoped would be burgeoning in the current geopolitical climate, slumped 24%. Revenue from commercial airplanes slipped 2.5% even though substantially more jets were delivered. Only the services division, which provides support to existing customers, managed to increase revenue.

At the same time, operating margins were squeezed badly.

Boeing is still reeling from the damage to its reputation caused by two plane crashes in 2018 and 2019, the grounding of planes for safety checks and the need for adjustments to the 737 Max’s flight handling system.

Matters were not helped when, in March, a Boeing 737-800 operated by China Eastern Airlines dropped from the skies and crashed into a mountain after losing contact with air traffic control, killing all 132 passengers on board.

Source: interactive investor. Past performance is not a guide to future performance.

There has admittedly been some good news. Sales announced already this year include 32 aircraft to existing customer Air Lease Corp Class A (NYSE:AL) and 20 to Caribbean airline Arajet.

German airline Deutsche Lufthansa AG (XETRA:LHA) this month decided to buy seven long-haul passenger aircraft and 10 freight aircraft. In addition, leases for two 777F freight aircraft will be extended. Encouragingly for Boeing, Lufthansa says the disruption to global supply chains has provided "very profitable market opportunities" for air freight. What is debatable is whether the persistently high demand for flying freight to beat just-in-time deadlines will continue if supply lines return to anything like normal.

March seems to have been a significant month for Boeing shareholders in recent years. The shares peaked at $440 in March 2019 before plunging to $95 a year later at the height of the pandemic. A subsequent rally to $280 petered out 12 months after that. However, any hope that March would again be a turning point this year were soon dashed and the slide continues unrelenting. There is no reason to believe that it will end any time soon.

The shares currently stand at $133. Since Boeing is lossmaking, there is no price/earnings calculation, nor is there a dividend or any prospect of one until there is a dramatic improvement in the company’s performance.

Hobson’s choice: I warned in January that if the shares did not find support at $190 then the next potential floor was $145. Even that gloomy prognosis understated the situation. The shares remain a sell. It is hard to believe they will not be back below $100 before this year is out.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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