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Boeing signals downtrend on overstretched valuations

An annual dividend yield of 3.39%, which is higher than S&P’s 2%, and an increase in the stock buyback program propelled the stock of the world’s largest aircraft manufacturer Boeing Co (NYSE:BA) to a 12-month high of $185.71 last week. While the long-term prospects look great for the company, in the short-term, we anticipate a healthy correction in the stock on the basis of the following arguments.

The Chicago, Illinois-based company’s fiscal 2016 fourth-quarter revenues of $23.29 were higher than Wall Street estimates of $23.19 billion, but lower than $23.57 billion reported in the same period of fiscal 2015.

For the quarter ended December 2016, revenue from defence aircraft sales fell by 18% on a y-o-y basis. Income from military sales plunged 34%, compared to the similar period of 2015. The revenue from commercial aircraft deliveries increased only 1% on a y-o-y basis.

Boeing

For the recent quarter, Boeing recorded a net income of $1.63 billion or $2.59 per share, compared with $1.03 billion or $1.51 per share in Q4-2015. Excluding costs, adjusted earnings were $2.47 per share, versus analysts’ estimates of $2.32 per share.

Looking forward, Boeing anticipates FY17 core earnings, which exclude pension and other costs, to be between $9.10 and $9.30 per share on revenues of $90.5 billion to $92.5 billion. The lower range of the earnings guidance is lesser than analysts’ estimates of $9.24 per share.

The company is also aiming to deliver 760 to 765 commercial planes in 2017. The upper end of the delivery guidance range is only 2.2% higher than the 748 deliveries made in 2016.

The asset base of Boeing had fallen to $90 billion at the end of fiscal 2016, from $95 billion a few years before. On the other hand, the long-term debt has increased by $1 billion. Most of the increase in earnings is due to share buyback program, which resulted in a decrease in the floating shares to 642.8 million.

On the basis of FY17 EPS guidance, the forward PE ratio works out to be 20. The historic PE average of Boeing is 18.3. Likewise, the historic PE average of S&P 500 is 19. Thus, it is clear that the stock is relatively overvalued at this point in time. So, fundamentally, we can anticipate the stock to remain range bound with bearish bias in the short-term.

The price chart indicates a shooting star candle pattern, marked by an aqua coloured circle. The RSI indicator has started declining from the overbought region. That points to a high probability of a decline in the stock price.

Boeing Stock Price: March 6th 2017

Boeing Stock Price: March 6th 2017

A binary trader can trade the probable downtrend by investing in a put option (or its equivalent) contract offered by a reputed broker. The contract should be bought before the price falls below $181.50. Likewise, a time frame of 7-9 days should be allowed for the expiry of the option contract.


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