Is Gold­man Sachs right about sell­ing Boe­ing?

Financial Mirror (Cyprus) - - FRONT PAGE -

Shares of Boe­ing Co. (NYSE: BA) dropped more than 3% at one point on Mon­day morn­ing fol­low­ing a down­grade from Neu­tral to Sell by an­a­lysts at Gold­man Sachs. That’s pretty harsh treat­ment for a stock that posted a new 52-week high last Fri­day and had gained nearly 25% in the past 12 months.

How long can the or­ders for new planes keep pour­ing in? And just be­cause new or­ders con­tinue to roll in, does that mean that the planes ac­tu­ally will get built? It is those very num­bers that an­a­lysts at Gold­man cited as the rea­son for their down­grade. Ac­cord­ing to TheStreet, the Gold­man an­a­lysts wrote: “The group has out­per­formed sub­stan­tially, while down­side risks have height­ened. … Af­ter nearly a decade of un­der­sup­ply­ing the mar­ket, Boe­ing and Air­bus have caught up. Boe­ing and Air­bus to­tal pro­duc­tion in 2015 will be close to dou­ble 2008 pro­duc­tion. A seats based sup­ply/de­mand model sug­gests the OEMs are now over­sup­ply­ing the mar­ket.”

Canac­cord Ge­nu­ity said nearly the same thing back in Oc­to­ber: “[W]e are con­cerned that the risk of over pro­duc­ing on the nar­row-body mar­ket in­creases sub­stan­tially as [pro­duc­tion] rates go up. As a gen­eral rule of thumb, many sup­pli­ers cite 100/month com­bined for both Boe­ing and Air­bus as a nat­u­ral limit, and are con­cerned that any­thing above this level is un­sus­tain­able for more than a short pe­riod of time.”

Over the past six years, Boe­ing’s stock price has gained more than 420% and Air­bus stock is up more than 340%. More than half of each com­pany’s gain came in the past two years or so. Or­der books are bulging at both firms, and both air­craft mak­ers have an­nounced in­creases to their pro­duc­tion their sin­gle-aisle, nar­row-body planes, the Boe­ing 737 and the Air­bus A320, to 47 and 46 a month, re­spec­tively, from around 42 cur­rently.

Boe­ing has also sug­gested that it can boost 737 pro­duc­tion to 52 - and 60 is not out of the ques­tion. If Air­bus should match those to­tals - and there is no rea­son to be­lieve it won’t - a com­bined 104 to 120 nar­row-body planes would be rolling off the as­sem­bly lines ev­ery month.

Gold­man and Canac­cord Ge­nu­ity both see that as some­thing like the old Cold War pol­icy of “mu­tu­ally as­sured de­struc­tion.” Right now, Air­bus has cap­tured a ma­jor­ity of the sin­gle-aisle mar­ket and Boe­ing has the larger por­tion of the dual-aisle mar­ket. And even the mar­ket for the larger plane will get more crowded as Air­bus adds a new ver­sion of its A330 and a long-range ver­sion of the A321, both threat­en­ing Boe­ing’s hold on that part of the mar­ket.

The down­grade had pushed Boe­ing’s shares down about 2.5% to trade around $154.37 shortly af­ter noon on Mon­day. The stock’s 52-week range is $116.32 to $158.83, and as we noted, the high was posted last Fri­day.

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