Boeing is one of the large cap winners from 2013 that has badly lagged the market indices in 2014. Even after a 10% from its February 5th low of 118.77, the stock is down 5% year-to-date, and trading below its 50 day moving average.
In a Morning Word post last month, Dan laid out his thoughts on BA. His scenario has held up true to form so far:
In some ways, BA was the poster-child for the 2013 U.S. equity rally. Investors ignored any and all bad news and piled into “story stocks”. BA’s trials with the Dreamliner in early 2013 were very well documented at the time, but since the financial press moved on in late Q1, the stock took off and gained nearly 60% in the final three quarters of the year. Since making new all time highs on Jan 22, the stock had a peak to trough decline of almost 18%. That is 18% in 10 trading days, before bouncing last week.
Looking at the 1 year chart below, the stock stopped right where most technicians might have guessed – at the $120 break-out level from October (green line), and right at my chartist Carter Worth of Oppenheimer’s sturdy and preferred 150 day move average (yellow line).
BA 1yr chart from Bloomberg
SO being mindful of the bounce, I would suggest that a re-tracement back to the 50- day moving average, also filling in the earnings gap, is probably as good as it gets, and the notion of new highs in the very near future may be extremely hard to achieve. Near crashes from all time highs, on volume, is the sort of price action that should get antennas up on raging bulls!
BA has not gotten above the $131 level in the past few weeks, despite the broader strength in the indices:
The stock has been sandwiched between its falling 50 day ma (now around $133) and its rising 150 day ma (now around $125), and below the area where most of the price action since last late October took place ($130-$145).
BA broke out to a new all-time high above $108 in September, and its monster move was quite a sight for a nearly $100 billion market cap company. However, BA’s guidance miss in late January set the stage for the fast move lower, and the stock has never recovered. While Boeing grew earnings 20% per year over the last 3 years, management laid out nearly flat earnings growth for 2014. Nevertheless, Wall Street analysts, as they are prone to do, remain stubbornly bullish, with 23 buys, 8 holds, and no sells.
Here was GS research’s justification for a continued buy rating after earnings:
Boeing reported a strong 4Q13 with EPS and cash flow above consensus. Initial 2014 EPS and cash flow guidance was provided and was below expectations. However, Boeing actual EPS and cash flow have both been substantially ahead of the initial forecasts in each of the past four years, and this looks similarly conservative…So we think the 2014 variance to expectations stems from other factors that are much less significant in ascertaining the company’s future cash generation potential. Aerospace, and Boeing, fundamentals remain strong and we reiterate our Buy rating on the stock.
Essentially, the GS analyst said that the miss was due to poor expected results in the Defense division (due to continued government budget cuts), but that the real driver of BA stock is the Aerospace division, which remains strong.
Yet, investors were not paying more than 20x earnings for BA at the end of last year for 0-5% earnings growth. If BA was able to spin off the defense division (which is not expected, lest anyone think I’m spreading rumors), then the GS analyst’s rationale would make more sense. But when you buy BA stock, you buy the whole company, warts and all.
Our view is that BA’s current valuation is still too optimistic given the company’s prospects. The technicals look quite bearish after the big volume selling after earnings, especially since BA has not even touched its falling 50 day ma with the SPX at a new all-time high. The 150 day moving average around $125 and the February low around $119 are the spots to watch on the downside.
Add it all up, and we were looking for a trade that targeted the 119 to 131 range in the coming weeks. The problem, as with our AAPL idea from last week, is that BA implied volatility is quite low, especially vs. recent realized:[caption id="attachment_37132" align="alignnone" width="600"] BA 30 day implied vol (blue) vs. 30 day realized vol (orange), Courtesy of Bloomberg[/caption]
The spread between 30 day realized vol and 30 day implied vol is at its highest of the past year. While implied vol is forward looking, we don’t like selling vol when the spread is that high.
We thought about the following trade:
Hypothetical Trade: Buy the BA ($129.20) Apr19th 135/125/115 Put Fly for $3.55
Ultimately, with 6 weeks until expiry, we did not feel comfortable pulling the trigger on that trade and waiting it out given recent realized volatility in BA. However, we’ll keep our eye on this one in case vol pops.