With its stock down 18.5% over the past two months, 2016 is off to a pretty rough start for Boeing (NYSE: BA). And according to one analyst, the situation's not bound to get better -- but worse.
The news
Just before the market opened yesterday, analysts at Canaccord Genuity dropped a bombshell: They're downgrading Boeing stock from buy to hold, and cutting their price target by 10% as well -- to $135 a share. That's the bad news. Now here's the good:
Canaccord Genuity is almost certainly wrong about Boeing -- and investors who take Canaccord's advice are cruising for a bruising.
You see, we've been tracking Canaccord's performance as a stock analyst for close to 10 years now. And what we've discovered over that time is that Canaccord just isn't very good at its job. Out a field of roughly 75,000 investors that we track here at Motley Fool CAPS, Canaccord Genuity ranks in the bottom 20%. Literally one of Wall Street's worst stock pickers, only 39% of the analyst's stock recommendations beat the market, and the average Canaccord pick actually underperforms the stock market as a whole -- by about 1 percentage point per pick.
But now here's the strange thing: A lot of the things Canaccord Genuity is saying today about Boeing are...the same things we've been saying here. Yet somehow, the analyst still manages to come to the opposite conclusion. How do they do that?
Here are three things you need to know.
The 777X airliner: Is it Boeing's trouble child? Image source: Boeing.
Thing No. 1: Boeing's 777 has "issues"
Canaccord leads off its Boeing review with a few comments on the oil price saga -- in particular noting that oil prices are low, and that this depresses airlines' demands for more fuel-efficient aircraft such as the Boeing 777X.
Repeating an observation we've made already, Canaccord points out that pricing pressure among airlines may depress demand for Boeing's more fuel-efficient version of its very popular 777 airliner. You've probably heard about the Twitter war that Delta's (NYSE: DAL) CEO got into with Boeing last year, right? How Delta said it could buy used Boeing 777s on the resale market for just $7.7 million, and had no interest in paying $400 million for a new 777-9X?
Well, Canaccord took that story and ran with it to conclude that older planes are not going to retire as fast in future years as they did back when oil prices were higher, and that this will cause Boeing to either drop the price on its 777X, sell fewer 777Xes -- or both.
So far, it seems to be right about that.
Thing No. 2: Production will stall
With record-high backlog numbers, Boeing has been scrambling to accelerate production of its planes -- its 737 line in particular -- to keep up with demand. By 2019, the company hopes to be building 57 single-aisle jets per month. Airbus (NASDAQOTH: EADSY) has countered that it might need to raise A320 production to 63 planes per month, and Boeing says it might come close to matching that, eventually producing around five dozen.
Canaccord doesn't think so. Warning that airplane demand will peak by 2019, Canaccord says "the probability of Airbus and Boeing hitting the 57-60/month rates on the narrow-body aircraft is lower" than previously thought. And here, too, Canaccord may be right.
Here at the Fool, we also noticed when Boeing's backlog suddenly stalled (albeit briefly) at the tail end of 2015. All of a sudden, new orders weren't coming through the in-door fast enough to replace the new planes flying out the out-door. Boeing moved quickly to fix that problem, and got backlog growing against in January (outselling Airbus nearly 3-to-1 in the process). But even so, the risk that backlog will resume shrinking again, obviating the need for production rate increases?
Thing No. 3: Boeing's numbers are coming down -- way down
So fewer 777s sold, and fewer 737s produced...toss in some concerns about the business cycle, and a fear that Boeing may not be a "growth story," but more of a cyclical play on the economy at large, and Canacccord drops its biggest bombshell of all: "We have lowered our peak 2019 FCF estimate to now ~$12B, down from our prior $15B estimate."
In other words, Canaccord still thinks that 2019 will be Boeing's best year ever, but it will be 20% less cash-profitable than previously thought. And that, says Canaccord, means Boeing is no longer a buy.
Believe it or not, I kind of agree with Canaccord on this point, too: Boeing will not generate $15 billion in cash profits in 2019. In fact, I'd go so far as to say it might not even make $12 billion.
And one more thing...
But here's where Canaccord goes (badly) wrong. Nobody -- but nobody -- ever thought Boeing would generate $15 billion in positive free cash flow in 2019 in the first place. To the contrary, the consensus estimate on S&P Global Market Intelligence is for Boeing to generate $9.8 billion in free cash flow (cash from ops minus capital expenditures) in 2019.
That's still 42% more money than the $6.9 billion that Boeing raked in last year, though. It still works out to a respectable 9.2% annualized growth rate. And with Boeing currently selling for just 11.5 times free cash flow, and paying its shareholders a 3.7% dividend yield, 9%-ish growth is entirely fast enough to justify buying Boeing at today's prices.
Long story short? Canaccord Genuity is right about a lot of things. But it's wrong to downgrade Boeing stock.
