Boeing's Story Is Changing And It Might Not Be Good

Canaccord Genuity's Ken Herbert downgraded the rating for Boeing Co BA from Buy to Hold, while reducing the price target from $150 to $135. He mentioned that intensifying pricing pressure and additional backlog risk, arising from higher investment in older aircraft when oil prices are depressed, make Boeing's FCF outlook difficult to achieve. The peak 2019 FCF estimate has been reduced from $15 billion to ~$12B to reflect a full recovery of the 787 deffered flows but reduced contributions from 737 and 777. The stock is now expected to trade more like a cyclical stock, rather than a FCF growth story, analyst Ken Herbert commented. "We now model in peak industry deliveries in 2019, and now believe the probability of Airbus and Boeing hitting the 57-60/month rates on the narrow-body aircraft is lower. Moreover, we believe concerns about the commercial cycle will limit multiple expansion for BA even as deliveries increase in 2017-2019," Herbert wrote. Although continued buyback by Boeing will provide a floor for the stock, the cash generation by 787 will not be adequate to drive multiple expansion. The analyst believes that the risk of Boeing forced to accelerate development spending on its Middle of the Market offering is growing. Boeing's shares would have limited multiple expansion, given cycle concerns, macro concerns and a higher probability of FCF estimate reductions.