Boeing Dowgrade: I Disagree

Here is a small summary of the downgrades (list provided to me by www.clusterstock.com)

Goldman downgrades Boeing (BA) from Neutral to SELL, target price $60. BA has been added to Goldman's Conviction Sell List.

Goldman downgrades Textron (TXT) from Buy to NEUTRAL.

Goldman downgrades Precision Cast (PCP) from Buy to NEUTRAL.

AmTech maintains NEUTRAL on Boeing (BA), target price cut to $67.

We also have an article in the Wall Street Journal stating

the landscape is shifting as oil prices rattle the underlying economics of the airline industry...The combined value of the orders for Airbus and Boeing planes exceeds $500 billion at list prices, so large-scale cancellations and deferrals could easily amount to tens of billions of dollars.

Officials at Boeing and Airbus, a unit of European Aeronautic Defence & Space Co., say orders for their jets are spread across a diverse group of carriers world-wide, insulating them from regional economic swings. But they acknowledge that they are in almost daily talks with airlines seeking to cancel or defer deliveries. Although most of these discussions involve U.S. carriers, signs of stress have emerged from India to Europe....

25% to 30% of the two makers' order books -- roughly equivalent to the number of planes that were intended to accommodate airline growth rather than replace aging planes -- could be subject to what he called the "flake-out factor" if oil prices continue their unprecedented rise.

To summarize, the analyst think that a weakening world environment and rising fuel prices will decrease demand for new planes and increase deferral and cancellations. The analysts are looking out to 2009, 2010, and 2011. I also want to add that the WSJ story is really misleading and has cherry-picked data.

In other words, they are making making an assumption on where the economy, aerospace demand, and oil prices will be 1-3 years old. I have a HUGE problem with this: they might as well be rolling dice with this many assumptions in their model. These guys are wrong half the time where economy and oil price will be 3 months from now but they are making predictions on where all all these moving part- world demand is dependent on the actions of 6+ billion people- will be in 3 years!

For instance, Goldman predicted a super spike of $150-200 in the next 6 to 24 months. What a precise range in such a narrow time frame! What we are seeing right now is clear demand destruction- opposite of their thesis. To contrast, Lehman brothers is now predicting a drop to $93 in 2009.

More importantly, there have been fears of order cancellations for at least 6 months now and all these fears have proved to be unfounded.

Lets get some news straight from the horses mouth. Here are some crucial statements from Boeing:

Despite the cost pressures in the second quarter, we achieved double-digit earnings per share growth in our first-half results.

Commercial airplanes continued to grow its backlog this quarter, with orders exceeding deliveries by a factor of 1.5. BCA's backlog now represents approximately eight times current annual revenues and remains diverse by region, product type and customer. In addition we continue to have unprecedented diversity in our commercial backlog, which now includes only 10% from U.S. airlines.

So far we have experienced a minimal impact on backlog, with only a handful of deferrals by U.S. carriers. We have had no cancellations to speak or, nor have the international carriers come to us to discuss deferral plan

[Although we expect some deferrals and cancellations,] Right now the demand for fuel-efficient new aircraft is still higher than what we can supply from our production plan.

What all this says to be is there is a possibility for some rough waters. However, even with some deferrals and cancellations will be offset by current world demand. Demand is outstripping supply by 1.5- that's really incredible. Also, we a backlog that is years of revenue. So by increasing production and recognizing revenue on delivery, I see little reason to fret until we see China, India, and the Middle East slowing significantly.