Boeing Stock - A Cut Too Far?
October 3rd, 2008
Goldman Sachs recent decision to persist with a negative downgrade on Boeing stock may seem like a prudent decision, especially in the wake of the ongoing credit crisis gripping the US and Europe - in reality, it can be argued that it fails to consider a number of factors that influence the direction and current status of the company.
As opined in late June of this year, the previous stock price cut and new target guidance for Boeing by Goldman Sachs was also devoid of factoring in key legacy programmes like the 737, 747 and 777, whilst also omitting the strength of Boeing’s Integrated Defense Systems arm and instead elected to wrongly focus solely on the 787 as the source of its reason behind cutting the target price.
All images courtesy of Boeing
Back in June, oil prices were hitting record highs. Now, as prices hover around $95 per barrel (correct as at close of NYSE trading on October 2, 2008), airlines that have managed to weather the storm are perhaps more cautiously optimistic that they can live with those sorts of prices and may even spur some profit next year. Those carriers that cannot adjust or cope will meet an unsavoury end regardless of fuel costs. As system wide capacity continues to be chopped across the world in the wake of high operational costs, the drive for efficiency is the key ingredient that separates success from failure.
Goldman stated in a note to investors that it “believes that the amount of funding from traditional aircraft financing sources is shrinking and that Boeing’s customers may face near-term challenges financing aircraft purchases.“
In a message to employees, Boeing CEO Jim McNerney remained positive that despite the ongoing credit woes, the company has not yet had any customers approach it for finance requests on current orders.
“The vast majority of our backlog (approximately 90 percent) is reserved for international customers, who have access to a wide range of financing options, including the U.S.. EXIM bank. While we have seen a very slight increase recently “in customers asking about the possibility of our financing their purchases, none have actually requested it yet,” he said.
Clearly then, the stark differences between Goldman’s views and the facts on the ground at Boeing couldn’t be more divergent.
Near term pressures are only going to be present for customers seeking to place all new orders as opposed to amendments of existing orders placed in the three record years between 2005-7. As it is, of those orders already placed, there has not be any echo or chorus of customers seeking to either refinance or seek alternate credit to fund existing orders.
One US-based analyst who spoke on condition of anonymity stated that Goldman “was again out to make a quick buck” by repeating its “sell” rating on Boeing stock.
While the current industrial dispute with the IAM ensues, Boeing’s near term risk of customer cancellations or potential new orders being lost to rival Airbus are unlikely to affect the company’s long term ability to produce and deliver the record backlog. The very fact that there have been just a handful of deferrals of existing orders represents a wide confidence that the strike may just prove to be a blessing in disguise for some carriers seeking to slow down deliveries, although other airlines have been upset that their plans to speed up deliveries has hampered their expansion plans.
The current market volatility seen in the run up to the US Senate vote on a $700bn bailout plan is being seen as a catalyst to drive down prices across the board on key US stocks, particularly those in the Dow Jones Industrials.
Let there be no doubt - stability will come and the strike at Boeing will end. Omitting those facts is as absurd as cutting guidance on the stock already pressured by wider economic uncertainty that may not even impact Boeing as critically as other companies.
Ignoring the fundamentals of Boeing’s strong and sound financial status coupled with a resurgent product line up headed by the 787 Dreamliner, one has to ask whether these target price cuts are even justified. As I noted back in June, Goldman had set a target price of over $90 a share - there still hasn’t been any major critical shift to warrant cutting back on a stock that has significant room to move upwards given the health of its business and its backlog.
While slowdowns across the board are both prevalent and expected, this is all too familiar with a bout of opportunism to slam the company while it grapples with internal strife.
It is this sort of short term volatility the markets could do without.
(Prior articles on the Boeing/IAM strike can be found by clicking these links here, here, here, here, here, here, here, here and here. )
Sphere: Related ContentEntry Filed under: Boeing, Boeing Commercial Airplanes, Boeing Orders
10 Comments Add your own
1. Doug McVitie | October 3rd, 2008 at 12:38 pm
On aerospace, GS has shown itself already this year to be more interested in capturing headlines than acting responsibly. The company once again portrays the surface depth of its industry understanding as there is no shortage of aircraft finance in the marketplace, as Boeing’s Carson confirms.
This is yet another GS example of attempted market manipulation — too many analysts with too much time on their hands and too little knowledge clearly have too much access to the internet.
A forced ‘market correction’ is neither justifiable nor prudent and GS will rue the day it went short on its thinking like this. No point in making a name for yourself if that name is “Disingenuous”.
2. JerryF | October 3rd, 2008 at 4:42 pm
The two Goldman Sachs downgrades can only be considered an inadequate and poor analysis or a premeditated act of trying to lower the price of the stock.
The Analyst failed to consider the depth of the enterprise, the backlog’s strength, the strong Balance sheet of the Company and the growth of new areas of deveopment. His downgrade was crude and inappropriate.
Goldman should be embarassed by this inadequate understanding of a major industrial company. It did a disservice to Boeing and to its own customers. Perhaps in the meltdown of its own field, it became confused and thought that everyone else was overleveraged and created pie in the sky products that were proven not to be able to fly or land gracefully.
3. mike j | October 4th, 2008 at 3:57 am
I wouldn’t trust Goldman Sachs, just as much as I wouldn’t trust Boeing Execs, just as much as I wouldn’t trust the US Congress, etc, etc…
they’re all crooks and liars in my book.
4. Starvin Marvin | October 4th, 2008 at 8:43 am
It’s quite interesting that Goldman Sachs downgraded Boeing stock just prior to the IAM employees upcoming payout through the share value program that Boeing had implemented. The stock price also dropped just before the previous payout was ready to come to fruition. Could there be a connection? Very possible. Maybe this should be brought up to the SEC.
5. DonS | October 5th, 2008 at 2:26 am
I wonder if anyone ever bothers to look up the financial incest involved in the Boeing Bored of Directionless
Obviously everyone has heard of the tie in of the financial fiasco to FAnnie mae and Freddie Mac, etc
So not only does Obama have Ken Johnson and Franklin Raines on his A list- but the Boeing Bored also has its ties
John McCain has Ken Duberstein. Kenneth sat on the Fannie Mae board from 1998-2007.
He helped McCain with his 2000 Presidential run and then headed George W.’s transition team to the White House.
While on the Fannie Mae Board, Ken’s firm got over $1.8 million for keeping the regulatory wolves away from the door.
Mr Duberstein has been on the Boeing Board since 1997 , the lead director since 2005 according to the 2006 annual report.
But wait - there is more
Look who just got hired into AIG by his Goldman Sachs buddy. its its . . . Edward M. Liddy !
From the Boeing site
Edward M. Liddy
Director Since 2007
Former Chairman of The Allstate Corporation. Mr. Liddy served as Chairman of the Board of The Allstate Corporation from January 1999 to April 2008. He served as chief executive officer of Allstate from January 1999 to December 2006, president from January 1995 to May 2005, and chief operating officer from August 1994 to January 1999. Mr. Liddy will become a partner in the private equity investment firm of Clayton, Dubilier & Rice, Inc.
Mr. Liddy is on the boards of the following public companies in addition to The Boeing Company and Allstate: 3M Company and The Goldman Sachs Group Inc. He also is chairman emeritus of Northwestern Memorial Hospital and serves on the boards of Northwestern University and the Museum of Science and Industry. Mr. Liddy is a member of the Compensation Committee and the Governance, Organization and Nominating Committee.
And still more - a BIG part of AIG is this little leasing organization called ILFC who own/lease a bundle of Boeing and Airbutt Aircraft
And of Course we have John S McDummy and HIS well established Korporate Kulture of Mendacity
http://home.att.net/~dshuper/Milsap.pdf read closely pages 70 to 80 . Boeing claimed in 2001 when I brought that up that it was not a Boeing problem since at that time MDC was not part of Boeing. Besides which , mcDummy is the largest individual stockholder on the board . Obviously no need to toss him off for lying to a federal judge while under oath. its his right !
Listen up Boeing grunts - due to the well known Bailout issue and the indirect involvement of members of the Board - there will be EXTRA classes and from now on all signatures on the ethics form will be witnessed and verified and in quadruple AND SENT TO THE BARNEY FRANKS- FRANKLIN RAINES KONGRESSIONAL OVERSIGHT KOMMITTEE- IN triplicate as is fitting and in accordance with the BEST ETHICS PROGRAM IN THE U.S
Trashing the U.S economy and whacking the financial status of the Boeing company with unethical practices is reserved for the Board members. Infringement on their turf will be punished !
6. mike j | October 5th, 2008 at 10:37 am
very interesting…
I wonder if the $850B bailout will get Boeing to give us (IAM) an acceptable contract by the end of the year…
I’ll bet Boeing KNEW ABOUT these finacial fiascos were already on their way well before the (now past) contract deadline on Labor Day– to try to make us sqirm and worry now that we’re out on strike…
If this strike ever settles (big IF), I’ll never ever trust even one single word Boeing Management says.
I wonder if the entire USA workforce will someday revolt?, or will we even have a USA in a few years? (sold off to China and they tell us to leave)
7. Jacobin777 | October 5th, 2008 at 3:55 pm
To Mike J…its attitudes like yours which got GM and Ford where it is now….
There is a recession going on, unemployment is at a 6-7 year high, ect. ect. Boeing is giving you guys excellent pay increase…and you people want more….
Forget it….
Between your strike and GS downgrades, I hope the stock goes lower as I can pick up some cheap shares for my retirement account…:-)
8. Jet Jockey | October 5th, 2008 at 4:57 pm
No. GM and Ford got to where they are now for the same reasons AIG, Fannie and Freddie,and WaMu did.
Piss poor management. Plain and simple.
It’s really easy to blame employee’s for corporate woes just as it is blaming the dead pilots who crashed the plane who cannot defend themselves. Who’s there to defend the employees?
So….if you really want to place blame on why the stock price is crashing, refer to comment #5 by Don S. and stop blaming the ones who actually build the planes.
9. mike j | October 6th, 2008 at 3:10 am
Thanks Jet Jockey.
Personally I probably could’ve “gotten-by” with the contract offer (I mean pay-cut offer).
But to Jacobin777, (I was working 777 just prior to strike) on the contrary, attitudes like mine would keep companies healthy, and our economy sane,
IF they ever wanted to test me out, I could run a company (or a country or the planet) into total profits and “raining-money” and prosperity everywhere, and I wouldn’t outsource even one job.
But the evil ones, and the very stupid ones who follow the evil ones, do not want it that way, so that is why it is all screwed up.
Piss-poor management is the ONLY reason GM, Ford, GE, etc etc, (and now Boeing) fail.
10. Janine Kingdom | October 7th, 2008 at 5:59 am
Boeing rolled out it’s PHONY 787 in July of 2007. They spent a small fortune on that big celebration. The stock kept going up. It was unethical and dishonest. Boeing made it look like that plane was ready to fly. Even without the strike the 787 would not have made it’s first test flight until early 2009. That’s a year and a half later. Of course management has known all along that the plane was way behind and they were lying to the public. They parceled out well timed delay announcements knowing that they were not a true and honest assessment. All workers were informed that if they spoke to anyone about the actual progress of the plane it would be cause for immediate dismissal.
I don’t understand why this is not a form of illegal stock manipulation. I’m sure there were many people who bought stock based on Boeing’s 787 dog and pony show. This is just one example that no one can trust anything Boeing management says. Each year all Boeing employees must acknowledge and sign a new ethics document. That of course includes the upper management. Do they actually read what they sign? A good leader leads by example.
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