Boeing (BA) Stuck in the Mud Ahead of Earnings

Dow component The Boeing Company (BA) reports third quarter 2020 earnings in Wednesday's pre-market, with analysts expecting a loss of $2.20 per share on $14.2 billion in revenue. The struggling aerospace giant reported a profit of $1.45 per share in the third quarter of 2019, highlighting a historic fall from grace, driven by mismanagement and the 2020 crisis. The aerospace giant's stock price has barely budged since July's second quarter report and is now trading less than two points below the close of that session.

Key Takeaways

  • Boeing is expected to report another quarterly loss on Wednesday morning.
  • The stock has entered a holding pattern in the $160s, barely budging since July.
  • The second pandemic wave increases the risk for renewed selling pressure.
  • The aerospace industry may not recover until the second half of this decade.

Boeing stock gained ground on Oct. 16 after European Union regulators ruled that the 737-MAX is once again safe to fly, but it has turned sharply lower on Monday morning in reaction to an unconfirmed report that the Federal Aviation Administration (FAA) has determined the 737-MAX software fix for "certain planes" was not "adequate." International relations are also weighing on price action, after China said that it would sanction the company for cutting a Taiwanese arms deal.

Boeing lowered its annual forecast for the commercial and defense aerospace market earlier this month, forecasting a total market value of $8.5 trillion compared to previous estimates of $8.7 trillion. The company projects demand for 18,350 commercial airplanes in the next decade, 11% lower than previous forecasts. Even this takedown may be too optimistic, with the rapidly growing inventory of idled airplanes and growing abandonment of expensive jumbo jets.

Wall Street consensus has been overly bullish since the March 2019 crash, with a current "Moderate Buy" rating based upon eight "Buy," nine "Hold," and just one "Sell" recommendation. Price targets currently range from a low of $147 to a Street-high $260, while the stock opened Monday's session about $24 below the median $188 target. These numbers still look too high, given collapsing aerospace demand and continued pandemic uncertainty.

Earnings per share (EPS) are calculated as a company's profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company's profitability. It is common for a company to report EPS that are adjusted for extraordinary items and potential share dilution. The higher a company's EPS, the more profitable it is considered to be.

Boeing Monthly Chart (2007 – 2020)

Monthly chart showing the share price performance of The Boeing Company (BA)

Boeing stock broke out above the 2007 high at $107.83 in 2013 and eased into a narrow trading range, testing new support for more than three years. It finally escaped the forces of gravity at the start of 2017, entering a historic trend advance that stalled in the $370s in 2018, when President Trump fired the first shot in the trade war with China. The stock broke out once again in February 2019, posting an all-time high at $446.01 in March, just before the Ethiopian crash.

The subsequent decline crawled toward the 2018 low, reaching within a few points in February 2020 and breaking down during the selloff. Boeing posted a seven-year low in March and bounced, remounting the broken 200-month exponential moving average (EMA) in June. Buying pressure then fizzled out, yielding a support test that is still in progress ahead of this week's third quarter confessional. The mid-$150s has emerged as the critical price in this exercise, with a breakdown exposing a trip to the prior low.

A little good news could go a long way in this scenario, but time is running out, with the second pandemic wave here and in Europe undermining months of improving sentiment. As a result, overflowing hospitals could easily overcome 737-MAX recertification in coming months and trigger an uncomfortable slide back into the double digits. Given this exceptional risk, the vast majority of investors are better served looking for other bottom fishing opportunities.

Bottom fishing refers to investing in assets that have experienced a decline due to intrinsic or extrinsic factors and are considered undervalued. A bottom fisher, a moniker given to investors who practice the bottom fishing strategy, speculates, using either technical or fundamental analytical techniques, that an asset's depressed price is temporary and will recover to become a profitable investment over time.

The Bottom Line

Boeing should obtain 737-MAX recertification in coming months, but the aerospace industry may not return to normal until the second half of the decade, undermining share value.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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