Is Boeing Stock Flying Too Close to the Sun?

By Adam Levine-Weinberg Markets Fool.com

After more than two years of stagnant performance, Boeing (NYSE: BA) shares have taken off in the past year. Indeed, Boeing stock has more than doubled the S&P 500's rise with a 50% gain during that period. The vast majority of the increase has occurred since September.

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On Thursday, Boeing reached another all-time closing high of $176.86. Yet while the stock is flourishing, the underlying business is no better than it was a year ago. As a result, I sold about half of my Boeing stock last week.

Boeing faces some headwinds

Three years ago, demand for Boeing's planes was buoyant. However, since then, the sharp drop in oil prices has made airlines less desperate to upgrade their fleets with the newest, most fuel-efficient technology. Meanwhile, economic weakness in some markets has caused various airlines to reduce their growth plans.

Thus, whereas Boeing brought in more than 1,000 net commercial airplane orders per year from 2012 to 2014, net orders fell to 768 in 2015 and 668 in 2016.

Order activity for Boeing jets has slowed since 2014. Image source: Boeing.

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Boeing still has nearly 5,700 firm orders in its backlog, which is an incredibly high number by historical standards. However, if order activity continues to decline, the company might be unable to raise annual output to more than 900 planesas planned (up from 748 in 2016) or to maintain that higher level of production.

Furthermore, more than 4,400 of Boeing's unfilled orders are for the workhorse 737 jet. By contrast, its widebody jets have much thinner backlogs, putting them at greater risk of production cuts.

For example, two years ago, Boeing was building nearly 100 777s per year and then-CEO Jim McNerney repeatedly stated that this rate should be sustainable through the end of the decade. Instead, Boeing has had to announce two production cuts since the beginning of 2016. In 2018 and 2019, Boeing is likely to deliver fewer than 50 777s per year.

Boeing has also slashed production of its 747 jumbo jet. And while the 787 Dreamliner -- now the company's top-selling widebody -- has more breathing room, many analysts think that Boeing will have to cut production of that model as well in a few years due to slowing sales.

There are still some reasons for optimism

While Boeing does face some challenges right now, it also has some big opportunities that could support Boeing stock in the coming years. First, the long-troubled 787 aircraft program is finally on track to become a big cash cow in the next few years, after costing the company tens of billions of dollars over the past decade.

The Boeing 787 program is finally starting to churn out cash. Image source: Boeing.

Second, the border-adjusted tax proposal championed by Republican congressional leaders could offer Boeing a huge windfall if it is actually implemented. This plan aims to encourage export activity by exempting revenue generated abroad when calculating corporate taxes. As a result, Boeing's tax rate could fall to zero -- or less.

Third, President Trump has expressed interest in having the military order more F/A-18 Super Hornet fighter jets. Not too long ago, Boeing's fighter jet business was in danger of shutting down by the end of the decade. However, between some recently secured foreign orders and a potential big U.S. order, the fighter jet business could actually return to growth soon.

The risk-reward balance is looking less favorable

Thus, while Boeing's outlook has deteriorated in some respects over the past year, in other areas its revenue and earnings growth prospects have improved. On balance, not much has changed -- other than investors' enthusiasm for Boeing stock.

After briefly falling below $110 last February, Boeing shares have surged more than 50%. The company's market cap is now around $108 billion. The big increase in Boeing's stock price means that its share buybacks won't go as far this year, which will restrain its EPS growth.

Boeing Stock Performance, 2016-present. Data by YCharts.

Additionally, Boeing faces other, less quantifiable risks now. Most notably, President Trump's "America first" rhetoric could cause a backlash against American products overseas, particularly in places like China, which is arguably Boeing's most important market.

Boeing stock still has enough long-term upside potential that investors shouldn't be running for the hills. On the other hand, after the stock's recent rally, any setbacks in the coming years could cause a sharp pullback in the share price. As a result, this could be a good time for holders of Boeing stock to take a bit of money off the table and lock in some gains.

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Adam Levine-Weinberg owns shares of Boeing. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.