Stock of the week: Boeing

14 September 2018

This content has been created by X-Trade Brokers Dom Maklerski S.A.

Summary:

  • Boeing raised forecast of demand in China for the next two decades

  • Boeing and Airbus planes dominate Chinese fleet

  • Around 15% of Chinese demand for next 20 years already in Boeing’s order book

  • Stock price reacts to the long term moving average

Boeing (BA.US) issued an updated forecast of Chinese demand for commercial aircraft through 2037. As China is slowly overtaking the United States as an aviation market leader, and is eventually expected to dethrone the US by 2022, securing future business in this country could be a key to increasing earnings in the years to come. In this analysis we will take a look at the demand estimates, major risks for the Boeing business in China and its latest earnings report

The share of Boeing’s revenue generated in China increased from 2% in 2000 to almost 13% in 2017. At the same time the share of sales made in the US shrank from around 65% in 2000 to 45% in 2017. Source: Bloomberg, XTB Research

Boeing released its updated forecast of the Chinese demand for commercial aircraft. Over the next two decades the company estimates that China will need as much as 7690 new airplanes to keep up with booming demand resulting from the country’s growing number of middle class. This marks a 6 percent increase compared to projections released last year. Moreover, the current China’s active fleet consists of around 3500 airplanes therefore estimates herald significant enlargement. As depicted on the chart above importance of the Chinese market for Boeing has increased significantly since 2000. However, details not presented here are even more interesting. Namely, Boeing delivered 202 airplanes to China in 2017, what accounted for around 25% of all deliveries made by Boeing that year. Additionally, at the end of 2017 orders from China constituted 20% of the Boeing order book which includes orders for as much as 5800 new planes. This means that 15% of the estimated Chinese demand for next two decades is already in the Boeing order portfolio. However, while these orders have been already placed they should not be taken for granted as there are some risks that may cause China to look for airplanes elsewhere.

Over 90% of the Chinese active aircraft fleet was produced by either Boeing (BA.US) or Airbus (AIR.FR). Source: CAPA, Bloomberg, XTB Research

The trade conflict between China and the US can be named as the major risk factor for Boeing right now. China has not included large aircrafts (Boeing 737 is seen as the only Boeing plane affected by the current tariffs but this model is approaching the end of its production run so the impact will be negligible in the long term) in the retaliatory list so far but it may change at any moment when a skirmish between two World’s biggest economies is heating up once again. In case when the US imposes tariffs on all Chinese imports the latter would not be able to respond at the same scale. President Xi could therefore try to punish Trump by targeting specific industries including large aircraft. Leving 25% tariffs on all Boeing airplanes imported by China could significantly decrease competitiveness of these machines in relation to ones manufactured by Airbus, Boeing’s major rival. Taking a look at the chart above one can see that Boeing (1670 machines) and Airbus (1598 machines) are dominant figures in the Chinese market. However, Airbus has one crucial advantage over Boeing in current situation… it is not an American company. Having said that, any impact on Airbus from the ongoing Trade War will be much smaller compared to Boeing. However, even if China imposes tariffs on all planes imported from the US it is unlikely that demand for Boeing aircraft will shrink to zero because given a significant market share that Boeing has in China, other manufacturers will not be able to substitute for Boeing production. Moreover, Boeing is currently building an assembly facility in China what may help company omit some of duties on airplanes when they are levied.    

Boeing has managed to greatly boost its profitability since 2010 with net profit margin staying above 9% in Q2 2018 against just 3.4% at the beginning of the decade. Source: Bloomberg, XTB Research

Boeing released its latest earnings report on July 25. The company generated revenue of $24.26 billion in the second quarter of 2018 marking a 5.24% increase YoY and a 3.75% increase QoQ. Net income increased by 25.56% YoY, from $1.75 billion (EPS equal $2.91) to $2.2 billion (EPS equal $3.77). However, on the quarterly basis Boeing experienced a drop of 11.34% in net income despite higher sales. Having said that, one can see that the QoQ drop resulted mainly from smaller operating profitability while the significant YoY advance can be ascribed to the more favourable tax environment in comparison to the previous year. Boeing’s executives refused to provide actual numbers or estimates in relation to the present US trade practices saying that material impact has not been spotted yet. However, the company recognized that tariffs on steel and aluminium “could affect supply-chain costs”. Speaking of Trade Wars it is worth mentioning one interesting situation. During this year’s Farnborough Airshow, second biggest airshow in the World where aircraft manufacturers can present their newest machines, Boeing recognized a steep drop in orders from Chinese customers. At the same time a number of orders from undisclosed clients spiked significantly. According to a Bloomberg report, most of these anonymous orders indeed came from Chinese customers but they did not want to draw attention in the light of the intensifying Trade War.

Just as many other US companies Boeing (BA.US) managed to reach new all-time high at the beginning of the year. After some weakness later on the stock once again set a new record, this time around $374.40, at the beginning of June. Since then the US airplane manufacturer was unable to produce any longer-lasting move in clear direction. Notice that the stock price is reacting to the 200-session moving average (purple line on the chart above) and to the short term upward trendline. Source: xStation5

This service is provided by X-Trade Brokers Dom Maklerski S.A. (X-Trade Brokers Brokerage House joint-stock company), with its registered office in Warsaw, at Ogrodowa 58, 00-876 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. X-Trade Brokers Dom Maklerski S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.

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