Could Boeing (NYSE: BA) stock price fall from its current level of around $160 to $130? Does that sound unlikely?

Consider this: About two years ago, BA stock was trading at about $120 — about 25% below where it is now. But by the end of last year, it had recovered significantly, trading at $260. At the current market price of $160, BA stock is down nearly 40% year-to-date and trades at about 1.4 times sales, well below the stock’s average price-to-earnings ratio of 2.2 over the past five years. Is the current multiple too low? Not when we consider the headwinds the company has faced recently.

Let’s look at what has happened at Boeing so far this year. On January 9, 2024, an incident occurred in which the cabin side panel on Alaska Air Flight 1282 (Boeing 737 Max 9) came off in mid-air. Following this incident, the Federal Aviation Administration halted plans to expand production for 737 Max aircraft. Later, in February, one of Boeing’s suppliers identified a new problem with the fuselage of several unfinished 737 Max aircraft. Boeing failed several product tests for 737 Max aircraft conducted by the FAA. ⁽¹⁾ The fuselage will be manufactured by one of Boeing’s suppliers – Spirit AeroSystems. Boeing will acquire Spirit AeroSystems in a deal valued at $8.3 billion (including debt). ⁽²⁾ With this acquisition, Boeing aims to solve the quality problems and achieve its production target of 50 aircraft per month in 2026.

The company manufactured 25 aircraft in July this year and plans to increase production to 38 jets by the end of 2024. However, some Wall Street analysts believe that the company may not reach this goal until 2025. Given the recent development that Boeing’s largest union has decided to go on strike as it could not reach an agreement with the company, it seems very difficult for Boeing to meet its planned production targets for 2024. ⁽³⁾

However, stock markets are often short-sighted and tend to extrapolate short-term trends into the long term. In Boeing’s case, the company is expected to take longer than expected to meet its production targets. This is important for the company’s profitability and cash flow, as most revenue is recognized at the time an aircraft is delivered. Given the current situation, risks abound and there remains a real possibility that the stock could see a significant correction, even after its nearly 40% decline this year.

How volatile was Boeing stock?

BA stock has seen a 25% decline from $215 in early January 2021 to around $165 now, while the S&P 500 has seen a roughly 45% increase over that roughly four-year period. However, BA stock’s decline has been far from consistent. The stock’s returns have been -6% in 2021, -5% in 2022, and 37% in 2023. In comparison, the S&P 500’s returns have been 27% in 2021, -19% in 2022, and 24% in 2023 – suggesting that BA lagged behind the S&P in 2021.

Particularly noteworthy is the Trefis High Quality Portfolio with a collection of 30 stocks. outperformed the S&P 500 every year in the same period. Why is that? As a group, the HQ portfolio stocks delivered better returns with less risk compared to the benchmark index; it was less of a rollercoaster ride, as evidenced by the HQ portfolio’s performance metrics.

Boeing’s sales growth could cool down

Boeing’s sales rose at a compound annual rate of 10.3% from $58.2 billion in 2020 to $77.8 billion in 2023. There is a huge demand for new aircraft due to the increase in global travel, and this trend is not going to change anytime soon. However, due to ongoing issues with Boeing, the company could lose this macro trend. The company saw an increase in aircraft deliveries from 340 in 2021 to 528 in 2023. However, the company has struggled to ramp up production, which has severely impacted its deliveries. Supply chain disruptions, labor issues, and the FAA cap further exacerbated the problems. Deliveries in recent years have been well below the 806 aircraft the company delivered before the pandemic in 2018.

Given Boeing’s ongoing problems, revenues are expected to decline slightly this year before rebounding next year as production is expected to increase. There is a chance the impact on revenues could be longer lasting if the company cannot reach an agreement with its largest union soon.

Boeing’s margins could be at risk

Boeing’s margins (net profit or profit after deducting all costs and taxes, calculated as a percentage of revenue), although negative, are showing improvement – ​​they improved from a level of about -20.4% in 2020 to about -2.9% in 2023. Our dashboard contains further details on the different components responsible for Change in Boeing’s net profit last year. On an adjusted basis, the net margin also improved from -22.8% to -4.5% between 2020 and 2023.

However, there is a real possibility that the company could continue to report losses in the near future and for a longer period than originally expected. Why? The company is struggling to expand its production, its costs are rising, and it has taken on an additional $10 billion in debt this year, bringing its total debt load to $58 billion. And the recently announced strike could cost the company around $3 billion. ⁽⁴⁾ Notably, the company’s operations have already burned through $7 billion this year.

What impact does this have on Boeing’s valuation?

While the average consensus estimate puts Boeing’s 2024 loss per share at $4.16, given Boeing’s ongoing issues, it is likely that losses could widen in the near future. In such a scenario, investors are likely to re-evaluate Boeing’s valuation multiple. Not only the bottom line, but revenue is also likely to take a hit this year. Instead of an expected low-single-digit revenue decline, a mid- to high-single-digit revenue decline would translate into revenue per share of about $120. If Boeing’s P/S ratio gradually declines by about 20% over the next twelve months from a multiple of about 1.4x revenue to about 1.1x, that could lead to a 20% decline in BA stock to $130 per share. Notably, Boeing’s P/S ratio has declined by over 20% since 2022.

And it could be another bumpy ride. While there is certainly a case for long-term gains from BA stock, the Trefis High Quality Portfolio could be just the ticket if consistent outperformance is high on your list.

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