It has been slow going for Boeing so far this year with its stock under performing the S&P500 by 9%. Over the past year, Boeing’s stock has been a Dow darling. Here is a chart of the past ten years showing Boeing outperforming the Dow from 2013.
What is going on that investors seem more wary?
Commercial aviation concerns may be the driver here. The industry has been having a tremendous period of market support. High oil prices helped drive demand for new, more fuel efficient, aircraft. But now oil prices are slumping. There is no sign that oil prices are going to go back up any time soon. The demand for those newer aircraft now look much softer. Hundreds of aircraft that were likely to be retired are now going to soldier on for a few more years. The reason an aircraft gets retired now is MRO costs, not fuel burn.
The next chart shows Boeing’s commercial aircraft history all the way back to 1958. Watch the how the curves relate to each other. The past few years has seen the backlog exceed its trend by an order of magnitude. The chart looks, quite simply, wobbly. Note that 2015 orders dropped substantially from 2014. The backlog may have peaked.
Much of that backlog is exposed – it requires high oil prices and strong customer support. But customers don’t need the newer aircraft as soon now. They will defer or delay deliveries. A lot of the backlog (about half) is dependent on customers based in risky markets.
If one cuts the backlog by half, the implications are obvious. That the backlog is risky is hard to argue. Is the ramp up still warranted? Perhaps not. For investors the story is changing. Even as the 787 is settled, the 777 transition and, especially, the 737 are concerns. There are too few 777s on order and, probably, too many 737s.
