Boeing: Hard Sell-off on Cancellation
Levels:
Long-term TAIL support of 69.91 holds; immediate-term TRADE upside to 73.11
Boeing sold off today following a cancellation by Qantas. We note that Qantas has its own operational issues, in addition to needing a “u”. The Australian market for commercial aircraft is about 1/10th the size of the US’s, which is only ~15% itself. Today’s decline highlights the risk of being in consensus long names. While it may not mean we will be wrong longer-term, it may increase downside volatility.
Rationale
- Cycle: Boeing is in the midst of a long up cycle in commercial Aerospace, with 7 years trailing revenue in backlog. The company also has a major product cycle in the 787.
- Industry Structure: Boeing has a largely unassailable competitive position in a highly consolidated industry.
- Valuation: The valuation of Boeing is attractive at these levels on a sector relative basis, in our view, both in a DCF and on screening metrics like relative EV/S (0.5 standard deviations below the trailing 8-year mean).
- Sector Relative: With growth slowing and estimates in the industrial sector under pressure, we believe BA remains an attractive destination for investors.
- Sentiment: Unfortunately, consensus seems to agree with us. We note that consensus can be right.
- Global aircraft fleet aging has set-up robust backlogs for commercial aircraft makers
- Strong deliveries in the late 1980s/early 1990s were partly driven by deregulation (US, UK, Japan in the 70s and 80s and, in the early 90s, Europe), which drove demand growth
- Late 1980s/early 1990s deliveries are now retired or approaching retirement (20 to 25 year sum)
- Boeing and Airbus have very high backlogs as deliveries have trailed orders for much of the last decade
Fleet aging is particularly noticeable in the US. Though only about 15% of commercial aircraft orders, the US aircraft fleet will need to be replenished over time.
