Last Trade Price: $168.08
Short Term Rating: Sell
Long Term Rating: Buy
Price Objective: $214.95
Business Strategy and Outlook
Boeing is a leader in aviation, aerospace, and defense technology supporting airlines. Boeing derives its business off four segments: Commercial Airplanes, Defense/Space & Security, Global Services, & Boeing Capital. Boeing is a global leader in design, development, manufacturing, sale, and support of commercial jets, military aircrafts, satellites, missile defense, and space services. They are one of the only two manufacturers of 100+ seat airplanes and is one of the largest defense contractors in the U.S. The other major airplane maker in this category is Airbus.
Boeing’s business strategy is based off its core businesses – Commercial Airplanes, Defense & Space, and Global Services. Sales of Commercial Airplanes make up 42% of all revenue. Boeing has fixed-price contracts with the commercial airline companies and these contracts depend heavily on a healthy production and supply chain.
The other key segment in Boeing’s Core business strategy is Government Defense and Space contracts. This segment makes up over 34% of Boeing’s current revenue and has allowed them to stay afloat in the midst of the pandemic. These long-term contracts have allowed Boeing to operate while losing money. Boeing features numerous defense products that are constantly being contracted out to the Department of Defense. A key feature for this business segment is the research and development of new defense products to be bought by the Government. Boeing is on the leading edge of development for new defense products.
|Next-Gen 737||F/A-18 E/F Super Hornet|
|737 MAX*||F-15 Programs|
|777(F)||T-7A Red Hawk|
|Business Jets||V-22 Osprey|
|*(F)Freight Planes||Unmanned vehicle MQ-25 & QF-16|
|NASA’s Space Launch System|
Performance and Risk
Tiger Wolf Capital focuses on two things: is this company profitable? Do people want to buy their product?
After taking a close look into the 10Q report of Boeing, we see that the company is operating at a significant loss. After two fatal crashes, Federal Aviation Administration (FAA) has forced the grounding of the 737 MAX, which made up 59% of Boeing’s Commercial Airline revenue back in 2019. As a direct result, Boeing faces risks include uncertainty in regulatory approvals on the return of their 737 MAX, a decrease in planned production, increased costs, and a decrease in supply chain health. The grounding of these planes has resulted in a significant reduction in their revenues, operating margins, and cash flows. In 2019, Boeing reported a 24% decrease in revenue from its prior year. Until FAA approves the return of the 737 MAX, we foresee Boeing to continue to loss growth in its year over year revenue growth.
As a direct result of COVID-19, global demand for travel as severally dropped. This is extremely concerning as Commercial Airlines make up 42% of their revenue and clients such as American Airlines, South West, and United Airlines are currently furloughing thousands of employees due to lack of demand in flights. As a result of this, the production of all their products have either slowed down or have completed been halted until 2021 / 2022. Shutting down factories in Q2, a lack of demand for new planes due to the travel ban, and massive losses from commercial airlines cancelling orders. Boeing revenue from this segment has dropped 78% since December of 2019 from December 2019.
Boeing’s defense segment has been healthy year over year and is only down -1% since December of 2019 from December 2018. Boeing was able to continuously add more Department of Defense (DoD) contracts and prop up the commercial segment of the business. Boeing’s Defense segment is very susceptible to changes in the defense spending budget. At any point with a change in defense spending the U.S. government can terminate or curtail Boeing’s contracts. Under President Trump, defense spending has continued to increase which has been extremely beneficial to Boeing. We believe that the Q3 earnings report should have a positive increase in the defense segment with the re-opening of factories and signing of new contracts.
By looking at both segments, we determine until Boeing receives approval on the 737 MAX and a continued low amount of travel, Boeing will continue to not be profitable. The increase in government spending on defense will unfortunately not offset the massive decrease in demand for commercial planes. In Boeing annual report from January 2020, we see that its total revenue has dropped 25% year over year.
The levels to watch are $144.46 and $171.39
Currently $BA is trading at $168.08. We seem to have found support around the Fibonacci level $144.46 and did quick bounce upwards towards $171.39. I recent days, this $169 – $171.39 have proven to be an extraordinarily strong resistance level for this stock and we have not seen any change in this. We will remain bearish on $BA until we can effectively get above and hold above $171.39. Every time we get near this $171 level, we will short the stock by buying weekly put options and target $160 / 162 and then reevaluate. We believe that BA will bounce up once we hit the low $160s and give us another entry to short it once it hits $170 again. Fail to hold the $160 level, we see $BA pulling down towards $145.
The case for the bulls:
We are witnessing the 14-day and the 30-day simple moving average curl upwards as $BA continues to retest this $171.39 level. We would anticipate the 14-day moving average to cross above the 30 day, this will make the trend bullish and once we get above $171.5 we should see a fast move towards the upside. We anticipate the company to be trading at $188-$214 soon.