Boeing (BA) Stock Probably Rallied Too Far, Too Fast

Despite the ongoing 737 Max issues and a decimated customer base, Boeing (BA) has already rallied back to $200 from below $90. Sure, the stock has a 52-week high near $400, but the airline no longer has any new commercial passenger jet orders after seeing their backlog as constrained due to production limits.

Boeing has borrowed the money to survive the near global shutdown of air travel, but the company has a very weak customer base here. Without a substantial rebound in passenger travel, the aircraft manufacturer could see the backlog plunge in coming quarters in a negative sign for the stock.

As far as the troubled aerospace giant’s verdict on the Street, it is a toss-up among analysts. Out of 21 analysts tracked by TipRanks in the last 3 months, 9 are bullish on Boeing stock, 11 remain sidelined, and 1 is bearish. The stock’s consensus target price stands at $18.83, which implies 5% downside from current levels. (See BA’s price targets and ratings on TipRanks)

Disappearing Orders

For May, Boeing reported the backlog fell to 4,744 planes, the lowest level since 2013. The company had four deliveries and only nine new orders while customers cancelled 18 orders with the majority from the 737 Max.

The weak order book comes after Boeing saw no orders in April and customers cancelled 108 orders. The airplane manufacturer started the year with over 5,300 unfilled orders, but the company has now seen the backlog dip by over 600 orders when including accounting adjustments eliminating placed orders unlikely to be filled now.

Boeing still has a substantial backlog for a company that delivered 806 commercial airplanes in 2018 before the 737 Max issue. The company expected to expand production from those levels and now has over 400 737 Max parked waiting on FAA certification to return to service.

As some of these aircraft are delivered, the stock faces the negative implications of the backlog collapsing. Any near-term turnaround in the demand equation and the approval of the 737 Max would adjust the negative view.

Weak Customers

The good news for investors is that Boeing isn’t entirely reliant on the commercial side of the business. In 2019, the company got about 40% of the business from the defense sector and global services seen more resilient here.

Though, the big issue is that major commercial customers around the globe have parked planes with no cash to purchase new planes. IATA estimates that the global air travel industry will lose over $84 billion this year and another $16 billion in 2021.

When customers are losing this much money and the 737 Max problem contributed to problems for customers, Boeing will be the last aerospace company to see a recovery in sales. With 2021 passenger traffic forecast down over 20% from 2019 levels, the commercial airlines won’t need to take delivery of new planes when existing fleet isn’t being utilized.

Takeaway

The key investor takeaway is that Boeing has rallied despite no signs that commercial customers are in any position to order new planes. The company has already seen net debt surge to $24 billion by March due to the over production of 737 Max planes expecting re-certification by the FAA to occur far before the Summer.

The most likely outcome here is pressure on the stock as 737 Max deliveries start occurring in a few months and the market gets hit with a dose of reality that the backlog will fall further.

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Disclosure: No position.