Boeing Co (NYSE: BA) stock has been hit hard by talk of a trade war between the U.S. and China in recent weeks, dropping more than 8 percent in March. However, analysts say China is heavily reliant on Boeing to supply its booming air travel industry, and China may be reluctant to make an example of Boeing.
After the U.S. imposed tariffs on imported steel, aluminum, solar panels and technology, China retaliated last week by announcing its own tariffs on 128 U.S. products. China accounted for more than a fourth of Boeing’s 2017 deliveries, so investors are rightfully concerned about an escalating trade war.
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However, Bank of America analyst Ronald Epstein says China would be putting itself in a difficult position if it were to target U.S. aerospace companies like Boeing.
“Given the global intertwined industry structure of aerospace, record industry backlogs, limited manufacturing capacity and strategic importance of air travel to economic growth, we think it is unlikely China will act impulsively to implement offensive trade barriers in aerospace but rather will take a more patient, long-term view,” Epstein says.
Epstein says China could target a wide range of U.S. products as part of its tariff retaliation, but “aircraft are not soybeans.” Boeing and Airbus essentially have a duopoly over the global aircraft industry, which Epstein says would make it difficult for China to replace Boeing’s business.
Despite the fact that an aggressive retaliation against Boeing is unlikely, investors have been dumping the stock, sending it near its lowest levels since early January. Epstein says Boeing shares are now pricing in an unlikely worst-case scenario.
“Our analysis suggests that the worst-case scenario for Boeing regarding China would be a 12 percent hit to free cash flow in 2020 and 2022,” Epstein says.
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CFRA analyst Jim Corridore also says Boeing’s China orders are safer than the market seems to think.
“We think China will continue to take delivery of, and order, BA aircraft,” Corridore says. “While production schedules are largely filled at Boeing and Airbus, we see it unlikely for major market share shift related to this issue.”
Bank of America has a “buy” rating and $470 price target for Boeing. CFRA has a “buy” rating and $405 target for BA stock.
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Boeing Co (BA) Stock Is Priced for a Worst-Case Scenario originally appeared on usnews.com
