After manufacturer's stock loses over 10% in a weekend, how should advisors be discussing the wider sector with clients?
On Friday the unused emergency exit door of a Boeing 737 Max 9 airplane was blown out of the aircraft due to an in-flight decompression event. Nobody was hurt and the plane — operated by US-based Alaska Airlines — landed safely. Boeing’s stock, however, fell into a tailspin dropping more than 10% by market open on Monday. The airplane manufacturer has not made a profit since 2018 and has been in something of a recovery mode since the grounding of its whole 737 Max fleet following an error with its autopilot software.
This latest accident has been followed up by the grounding of 171 planes and the discovery of loose bolts on other Boeing 737 Max 9 aircraft. Boeing’s stock as well as the stock of some major airlines has struggled somewhat. To Francis Sabourin, director of wealth management and portfolio manager at Francis Sabourin Wealth Management of Richardson Wealth, investors should be greeting this news with a healthy sense of trepidation about Boeing, but advisors should be looking at the wider dynamics of the global aircraft and airline industries to find the potential for opportunity.
“At the end of the day, people need to fly and who’s going to manufacture those planes?,” Sabourin says. “There are really only two players: Boeing and Airbus. If you look at the financials or the KPIs of Boeing vs. Airbus, Boeing has been suffering while Airbus has been much more stable, with no major headlines about safety. From our point of view Airbus is a much better investment than Boeing now.”
Sabourin cites the past five years of performance between Boeing and its sole competitor. The American airplane manufacturer is down around 35 per cent over that period, while the Anglo-French Airbus is up almost 62%. Boeing has been bleeding cash for years while Airbus has made as little noise as possible, which is what investors tend to want from their airplane manufacturers.
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Nevertheless, Sabourin sees a potential long-term value play in Boeing’s stock now that it faces a renewed challenge. Airline manufacturing is essentially a duopoly between these two companies, it’s very hard for smaller players like Embraer or Bombardier to manufacture and maintain the kind of massive jet aircraft that Boeing and Airbus make. That means Boeing still probably has the scale and competitive moats to weather its current weakness and resume its place in the market. If an investor is prepared to weather shorter-term volatility and medium-term underperformance, they may be rewarded in the long-run from an allocation to Boeing.
The disaster has also impacted the stock performance of some of the airlines operating these planes. Sabourin attributes that more to the impact of ETFs than an expectation that this accident will cause a meaningful shift in demand for flights. Many investors and even institutional managers now hold airline and airplane manufacturing stocks inside ETF packages. As calls went out to sell Boeing allocations, Sabourin says that included many ETF allocations that held positions in airline companies as well.
While some investors might cite Boeing’s considerable defense contracts with the US government as evidence of its long-term sustainability as an investment, Sabourin believes that there are other potential players in the defense industry that could be a better play. Lockheed Martin, for example, doesn’t have the same issues with cashflow. Government contracts on the whole can also prove challenging for investors given their more fixed terms.
As advisors field questions from their clients about potential allocations to airline manufacturers, or the long-term opportunities in an embattled giant like Boeing, Sabourin believes there should be an emphasis on some of the more fundamental long-term dynamics driving demand for flights and airplanes.
“The airline industry should be doing much better because the cost of fuel is dropping right now. People are still travelling, we need new airplanes that are more energy efficient, we see things growing,” Sabourin says. “All the airports are full in North America, it’s getting more and more affordable, everyone’s flying because it’s cheaper and faster.”
