Boeing Stock Could Fall Another 20%

Could Boeing stock (NYSE: BA) fall to $130 from the roughly $160 level it is at currently? Does this sound unlikely?

Consider this: about two years ago, BA stock was trading at around $120 – about 25% below the current value. It did see a sharp recovery to levels of $260 by the end of last year. At the current market price of $160, BA stock is down nearly 40% year-to-date, and it trades at about 1.4x trailing revenues, much lower than the 2.2x average P/S ratio for the stock seen over the last five years. Is the current multiple too low? Not if we consider the headwinds that the company is facing lately.

Let’s see what has happened with Boeing so far this year. There was an incident in which the cabin side panel detached midair on Alaska Air (Boeing 737 Max 9) flight 1282 on January 9, 2024. Following the incident, the Federal Aviation Administration (FAA) halted the production expansion plans for 737 Max aircraft. Later, in February, one of Boeing’s suppliers found a new problem with fuselages on several unfinished 737 Max planes. Boeing failed in various product audits conducted by the FAA on 737 Max airplanes. ^[1] The fuselage is made by one of Boeing’s suppliers — Spirit AeroSystems. Boeing will acquire Spirit AeroSystems in an $8.3 billion deal, including debt. ^[2] Boeing, with this acquisition, aims to address the quality issues and get on track for its 2026 production target of 50 airplanes a month.

The company made 25 airplanes in July this year and plans to ramp up to 38 jets by the end of 2024. However, some Wall Street analysts believe that it may be well into 2025 when the company achieves this target. Now, with the latest development of Boeing’s biggest labor union deciding to go on strike as they were unable to reach an agreement with the company, it seems very difficult for Boeing to meet its planned production targets for 2024. ^[3]

That being said, stock markets are often myopic and tend to extrapolate short-term trends for the long run. In Boeing’s case, the assumption is that it will take more than anticipated time for the company to meet its production targets. This is important for the company’s profitability and cash flows, given that most of the revenues are recorded at the time of the delivery of an aircraft. Given the way things are, there are multiple risks and there remains a real possibility that the stock could see a sizable correction, even after its nearly 40% drop this year.

Just how volatile has Boeing stock been?

BA stock has faced a decline of 25% from levels of $215 in early January 2021 to around $165 now, vs. an increase of about 45% for the S&P 500 over this roughly three-year period. However, the decrease in BA stock has been far from consistent. Returns for the stock were -6% in 2021, -5% in 2022, and 37% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that BA underperformed the S&P in 2021.

Notably, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Boeing’s Revenue growth could cool off

Boeing’s revenue rose at an average annual rate of 10.3% from $58.2 billion in 2020 to $77.8 billion in 2023. There is a massive demand for new aircraft with a rise in global travel, and this trend is not going to change anytime soon. However, with the ongoing issues with Boeing, it may be losing out on this macro trend. The company saw a rise in airplane deliveries, from 340 in 2021 to 528 in 2023. However, the company has struggled to ramp up its production which has severely impacted its deliveries. Supply chain disruption, labor issues, and the FAA capping further added to its woes. Deliveries over recent years have been far below the 806 airplanes the company delivered before the pandemic in 2018.

Given the ongoing issues at Boeing, its sales are estimated to see a slight decline this year, before regaining momentum next year, with an expected increase in production. There is a possibility that the impact on sales could be prolonged if the company is unable to soon reach an agreement with its largest labor union.

Boeing’s margins could be at risk 

Boeing’s margins (net income, or profits after all expenses and taxes, calculated as a percent of revenues), although negative, have been on an improving trajectory – they improved from levels of about -20.4% in 2020 to about -2.9% in 2023. Our dashboard has more details about the various components responsible for Boeing’s net income change last year. Even on an adjusted basis, the net margin improved from -22.8% to -4.5% between 2020 and 2023.

However, there is a real possibility that the company may continue to post losses in the near term and for a longer period than earlier anticipated. Why? The company is struggling to expand its production, its costs are on the rise, and it has taken on additional $10 billion debt this year, taking its total debt burden to $58 billion. And the recently announced strike could cost the company around $3 billion. ^[4] Notably, the company’s operations have already burnt $7 billion in cash so far this year.

How does this impact Boeing’s valuation? 

While the average of consensus estimates places Boeing’s loss per share at $4.16 in 2024, given the ongoing issues with Boeing, it is likely that its losses may expand in the near term. In such a scenario, investors will likely re-assess the valuation multiple assigned to Boeing. Not just the bottom line, its sales are also expected to take a hit this year. Instead of a low-single-digit expected decline in sales this year, a mid-to-high single-digit decline in sales would translate into revenue per share of around $120. If Boeing’s P/S ratio gradually shrinks around 20% over the next twelve months from a multiple of about 1.4x revenues to around 1.1x, this could translate into a 20% decline in BA stock to $130 per share. Notably, Boeing’s P/S ratio has declined over 20% since 2022.

And it could be a bumpy ride yet again. While there is certainly a case to be made for more long-term gains from BA stock, the Trefis High Quality (HQ) Portfolio could be right up your alley if consistent outperformance is at the top of your list.

[1] Returns as of 9/13/2024
[2] Cumulative total returns since the end of 2016

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1. F.A.A. Audit of Boeing’s 737 Max Production Found Dozens of Issues, Mark Walker, The New York Times, March 11, 2024 [↩]
2. Boeing’s Press Release, July 1, 2024 [↩]
3. Boeing Union Goes On Strike, Halting 737 Production, Sharon Terlep, The Wall Street Journal, Sep 13, 2024 [↩]
4. Boeing workers line up to vote on contract, could strike on Friday, Joe Brock and Allison Lampert, Reuters, Sep 13, 2024 [↩]