What: Shares of commercial jetliner and military aircraft manufacturer Boeing (NYSE:BA) took it on the chin during Monday's trading session, falling $3.57, or 2.3%, to close at $154.74 after receiving a rating downgrade from one Wall Street firm, while also nabbing a price target increase from another.
So what: One on side of the coin, Noah Poponak and his team at Goldman Sachs downgraded Boeing to "sell" from "neutral" and slashed its price target, or what it perceives to be Boeing's fair value, to $132 from $146.
Poponak and his team suggest that low fuel prices could encourage commercial airlines to hold off on new orders, and that since Boeing's near-term cash flow is so highly correlated to 787 orders it could feel a sting from an orders slowdown. Poponak believes Boeing's medium-term cash flow expectations are currently too high and would encourage investors to instead look toward aerospace parts suppliers, which often have higher margins, if they want to be a player in this space.
On the flip side, William Mullin at Stifel Nicolaus reiterated his firm's "buy" rating on Boeing shares, but upped its price target to $175 from $160, implying an additional 13% upside based on Monday's closing price.
Specifically, Mullin believes improvements in the production of the 787 will lower costs, 777 orders will remain stable, and the 737 rate increase will help drive continued gains for investors. Mullin justified the new price target by simply factoring in an estimate of 11 times EBITDA for Boeing's 2016 forecast.
Now what: The real question that investors have to ask here is: Between these dueling analysts, which one is right?
To be fair, each research firm makes a valid point. To credit Mullin, the 787 is still a relatively new build, all things considered, and could easily see cost reductions and improved efficiencies that boost margins. Additionally, a Republican Congress and President Obama do seem to be on the same page with believing that defense spending should increase, which is always great news for Boeing.
Yet Poponak's theory holds water as well. Lower jet fuel costs remove the pressure some airlines may feel about retiring older and less fuel-efficient planes. Some companies may choose to keep older aircraft in the skies or simply turn to leasing instead. There's also the relatively sketchy history of the 787, which has been wrought with delays and technical issues.
Ultimately, my view tends to align closer with Goldman Sachs than Stifel Nicolaus over the next couple of years. With oil well off its highs and defense spending in the U.S. hit-and-miss, Boeing's going to have a difficult time growing its EPS by anything higher than low-to-mid single-digits, in my opinion. Even after yesterday's tumble, Boeing is valued at 17 times 2016's EPS forecast, yet its organic growth rate is likely to be in the low single digits. While I agree that the high barrier to entry in its industry should net it a premium, I view its shares to be fairly valued here and would encourage investors to look for more intriguing values elsewhere.