The Dow Jones industrial average crashed more than 700 points on Thursday on fears that President Donald Trump’s latest tariffs on Chinese technology could lead to a trade war that will eat into profits of American companies. One of the companies that has been mentioned as a possible retaliation target is Boeing Co (NYSE: BA), and analysts say Boeing could lose a fourth of its value if a trade war breaks out.
Following a 5 percent drop on Thursday, Boeing stock is down 9.2 percent in the last month on trade war fears. In 2017, 70 percent of Boeing’s deliveries went outside the U.S.
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Morningstar analyst Chris Higgins says Trump’s new tariffs on steel and aluminum may have a marginal negative impact on Boeing’s costs, but a trade war is much more dangerous.
“Retaliation from China, which accounted for more than 25 percent of 2017 total deliveries and represents an estimated 20 percent of Boeing’s backlog in unit terms, remains the most significant threat,” Higgins says.
However, Morgan Stanley analyst Rajeev Lalwani says that, while China represents a large part of Boeing’s business, China may be reluctant to make an example out of Boeing.
“Key countries such as China, which may respond given the uptick in rhetoric, have limited options (for now) in terms of commercial aircraft per the Boeing/Airbus duopoly that exists,” Lalwani says.
Morgan Stanley estimates that the loss of 2019 orders from China and Iran, which has also been identified as a potential trade war threat, would cost Boeing only about 10 percent of its 2019 cash flow, or about $2 per share of Morgan Stanley’s $25-per-share estimate.
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But while the treat to Boeing’s business may be minimal, that doesn’t mean that the stock couldn’t take a much larger hit. If market sentiment begins to shift against Boeing, Lalwani says the stock’s free cash flow multiple could drop from a range between 13 and 14 down to a range between 9 and 10.
“When applying these levels to our 2019 forecast of $25 per share, it would imply the stock could be worth $250 versus the current $340, indicating downside of 25 percent,” Lawani says.
CFRA has an “overvalued” rating and $284 fair value estimate for Boeing. Morgan Stanley has an “equal-weight” rating and $373 target for BA stock.
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Boeing Co (BA) Stock May Be the First Casualty of a Trade War originally appeared on usnews.com
