Boeing's stock rocked by analyst's sell call, which sees 25% downside

By Tomi Kilgore

Wells Fargo downgrades stock to underweight, slashed price target to $119 ahead of likely large equity raise

Shares of Boeing Co. took a beating Tuesday, after Wells Fargo warned investors to get out, as whatever decision the troubled aerospace giant makes on what to do with its cash and debt will likely be bad for the stock.

The stock (BA) tumbled 8.7% in morning trading, enough to pace the S&P 500's decliners, and to put it on track for the lowest close since Nov. 3, 2022. It was also headed for its biggest one-day selloff since it sank 8.8% on Oct. 26, 2022.

The stock's $15.07 price decline was shaving about 99 points off the price of the Dow Jones Industrial Average DJIA, which was falling 477 points, or 1.2%.

Wells Fargo analyst Matthew Akers cut his rating to underweight, after being at hold since January. He slashed his stock price target to $119 to $185, to make him the most bearish of the 30 analysts surveyed by FactSet who cover the stock.

The new target implies about 25% downside from current levels.

Basically, the reason for the downgrade is that Boeing has a problem with free cash flow per share, which Akers said is the primary valuation metric for the stock, and with debt.

Akers noted that Boeing has about $45 billion in net debt, something he believes the company has to address before it kicks off its next aircraft development cycle. Keep in mind that Boeing needs to clean up its balance sheet, as it is under threat to have its credit rating cut to "junk" status.

Read: Boeing bondholders get defensive ahead of potential downgrade to junk.

Akers estimates that Boeing would need to use up all of its free cash flow through 2030 to get down to "zero net debt," which was roughly its pre-COVID average.

However, he believes Boeing would have to launch development of a new aircraft by 2027 to 2028, to keep pace with rival Airbus SE's (EADSY) (FR:AIR) plans.

That's the conundrum for Boeing.

If it kicks off the new aircraft development program before it cleans up its balance sheet, a credit downgrade would raise borrowing costs and hurt the stock.

If Boeing waits till its balance sheet is clean to launch a new aircraft, Boeing will fall behind its rival, leading to fewer orders, which would hurt the stock.

Akers believes what Boeing will do is try to shore up its balance sheet earlier, so it can launch a new aircraft. How will Boeing do that?

He thinks Boeing will sacrifice further downside for its stock by raising capital through a "significant" equity raise that will dilute current shareholders by about 30%.

"We estimate a $30 billion equity raise in 2026 would bring Boeing's net debt back to zero in time to kick off a new development program in 2027," Akers wrote in a note to clients.

This comes at a time that Boeing faces other risks over the coming year, including contract negotiations with its machinists union, integration and cash considerations for its $4.7 billion deal to buy purchase of Spirit AeroSystems Holdings Inc. (SPR), continued aircraft production limits by the Federal Aviation Administration and new issues with its 777x aircraft and the Starliner spacecraft.

Boeing's stock has plunged 39.1% year to date, while the S&P 500 index SPX has gained 16.8%.

-Tomi Kilgore

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09-03-24 1130ET

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