Boeing Shares Slip After Goldman Downgrade

Boeing shares were down more than 2% to as low as $153.36 in Monday morning trading after Goldman Sachs Group lowered its rating of the stock to sell from neutral. The bank’s caution regarding the manufacturing giant is part of its larger wariness surrounding the aerospace industry.

For six year Goldman has held a favorable view of commercial aerospace but lowered its official near-term position from attractive to neutral Monday after judging that the sector had outperformed “substantially” and that downside risks have increased. A note on the change points out that for close to a decade producers like Boeing and France’s Airbus under-supplied the market. Over roughly the same period Boeing shares have significantly outperformed other stocks, gaining close to 200% and hitting an all time high of $153.83 during trading Friday.

BA data by YCharts

Recent gains — Boeing stock is up about 19% year-to-date — have been driven by a massive fourth quarter earnings beat reported in late January and by an upgrade from broker Sterne Agee just last week. Sterne Agee gave Boeing a price target of $196 up from $164. In contrast, Goldman analysts, lead by Noah Poponak, gave Boeing a price target of $132 down from $146.

Goldman is judging that the favorable supply-demand equation that has bolstered Boeing’s earnings and in turn its share price in recent years has run its course. Combined Boeing and Airbus production this year will be close to double the 2008 level. At the same time they see economic volatility in the regions where demand for new aircrafts is strong as a substantial risk. Poponak also raised concerns that the recent uptick in aircraft replacement orders will dissipate as airlines start operating based upon expectations of lower oil prices.

“A seats based supply/demand model suggests the OEMs [original equipment manufacturers] are now oversupplying the market. And the traffic growth and replacement demand required to sustain medium-term planned production may prove tough to achieve,” writes Poponak.

He is , however, careful to point out that Goldman’s long-term view on the sector remains positive and that strategic names remain buys for investors with substantial time horizons. “We still believe the demand to fly / growth in air travel, and growth in new aircraft production will outpace global GDP over the next 10-20 years, as the percentage of the global population that regularly flies is still very low,” he writes. Goldman maintained buy ratings on aerospace suppliers Esterline, BE Aerospace, TransDigm, Hexcel and United Technologies.

Boeing isn’t one of those names in part because it has been too successful. “Boeing is most exposed to new aircraft demand risks. The 787 deferred target keeps moving higher in large chunks; and we think free cash may end up disappointing expectations.”