Boeing has been a major laggard in 2014, after a monster performance in 2013 on a breakout to a new all-time high. We have been negative on Boeing for the past year as a result of the stock’s elevated valuation, tepid global growth, and a difficult backdrop for the defense segment.
Now that global growth fears are intensifying, Boeing investors might start to get a bit more nervous. The company gets about 60% of its revenues from outside of the U.S., but if you exclude the defense segment (where revenues and earnings have actually been contracting in the past year), Boeing is even more levered to international demand in the commercial airline segment.
Boeing has grown sales over 10% and earnings over 15% in the commercial airlines segment over the past year, compared to a slight contraction in both sales and earnings for the defense segment:
Moreover, the real growth in EPS so far in 2014 for BA has been due to buybacks and lower tax charges, a general theme for many large cap stocks in the U.S. over the past year.
The reason why that is a concern is not simply because it’s not real earnings – it is real. It’s because that implies that the underlying business is not nearly as strong as the headline EPS growth indicates. If global growth does decline, then Boeing’s commercial airline business is at serious risk of contraction, especially since international travel is one of the first sectors to see demand pull back on general economic weakness. Considering that the defense business is in long-term decline with the U.S. government’s sequestration plan, that does not leave many outs for BA to generate growth in the coming years.
Analysts have cut 2015 and 2016 EPS growth expectations to around 5% per year, much lower than the 15% modeled in a year ago. Boeing’s multiple has contracted as a result:[caption id="attachment_45813" align="aligncenter" width="600" class=" "] BA trailing 12 month P/E, courtesy of Bloomberg[/caption]
However, at a P/E of 18.5, vs. expected EPS growth of 5%, Boeing hardly looks cheap. Moreover, given the risks I outlined above, the stock’s potential upside vs. downside seems skewed lower.
Amidst this fundamental backdrop, the stock has been rangebound for the past 9 months, ever since the market ratcheted down growth expectations after the disappointing late January earnings report:[caption id="attachment_45841" align="aligncenter" width="600" class=" "] BA daily chart, 200 day ma in yellow, courtesy of Bloomberg[/caption]
The $130 level is the critical spot to watch in BA on the upside, as the 200 day ma has flattened out, and the stock has been below $130 for the past 3 months. On the downside, $120 is crucial support.
Because of the rangebound price action and the low overall volatility in the market as a whole, implied volatility in BA has remained near 2 year lows for the past 4 months:[caption id="attachment_45843" align="aligncenter" width="600" class=" "] BA 30 day implied volatility, courtesy of Bloomberg[/caption]
However, if the broader market starts to come under pressure, particularly on fears about global growth, BA is one of the first large cap stocks likely to be sold by portfolio managers. It is already negative on the year, and it is quite exposed internationally. With that in mind, we like a bearish trade on BA that captures the next earnings report in late October.
In particular, I was eyeing the Nov 125 / 115 put spread for around $2.25. BA is down nearly 2% this week, so I’m going to wait for a bounce in the stock before entering a new position. I’d feel much better about my odds if I entered a short with BA closer to $130 resistance.