Goldman Drops Boeing From Conviction Buy List
Goldman's "conviction buy" list claims its latest crashing (not literally) and burning (literally) casualty.
We are removing Boeing from the Conviction List. It remains Buy rated. There is no change to our very bullish Aerospace sector thesis. However, our sector view is largely driven by the unique cyclical and secular dynamics of the legacy business, but it now appears the new product cycle of the 787 program has renewed risk of being incrementally problematic before delivering the earnings and sentiment catalyst that we still believe will eventually be realized. Since we added it to the Conviction Buy List on 5/10/10, BA is down 2.5% vs. the S&P 500 up 4.6%. Over the past 12 months it is up 34.9%, vs. the S&P 500 up 11.0%.
The 787 program has experienced multiple potential new issues in a short period of time since its last official delay, driving weakness in the shares. News on Rolls engines remains concerning, and reports from airlines imply another delay is possible or that at a minimum the ramp will be slower. While the cause of yesterday’s fire remains unknown, the event suggests the possibility the program may face a new issue of overheating given many more electronic components compared to prior generation aircraft. We also have some concern that BA’s initial 2011 guidance provided in January may disappoint, because historically the company has provided very conservative initial guidance. As a result, we believe BA shares may tread water in the near-term as more light is shed on these issues.
However, our very positive medium-to-long term view of the Aerospace sector and of Boeing remains intact. We continue to: (1) favor the emerging market growth tailwind the sector enjoys, (2) believe the cycle has turned and traffic and orders can surprise to the upside, and (3) believe the market under-appreciates the extent to which Boeing and Airbus still need to deliver on the last cycle’s massive order backlog. Precision Castparts (PCP) remains a top pick and on the Conviction Buy List in this context. Our 12-month, $88 price target is derived from target 2012E P/E. Risks include 787 challenges, current program ramp-up, and Defense spending.