The low oil price environment has reduced demand for new airplanes, weight loss efficient models dwindle important from an overall cost perspective.
So despite strong passenger traffic, this should eventually cause a reduction in order backlogs for the likes of Boeing Co.
That’s a primary reason why Canaccord Genuity downgraded Boeing to carry from buy on Thursday.
Analyst Ken Herbert, who also cut his price target around the stock to US$135 from US$150, noted that interest in lease extensions remains quite strong and lessors are beginning to determine more slots available.
He noted that aircraft retirements for Airbus and Boeing fell to 28 in the past 3 months. That when compared with 104 retirements in the same period last year.
Herbert doesn’t believe that trend can change given where oil prices are and what the leasing picture looks like.
“Up to the last few months, we believe investors were largely centered on the delivery schedule, the big backlogs at both Boeing and Airbus, and the subsequent free income generation and harvest,” the analyst said in a report.
Herbert noted that although lower fuel costs haven’t yet place a noticeable dent on order backlogs at Boeing and Airbus, he does think investors are beginning to element in additional risk to Boeing’s delivery schedule, and thereby its free cash flow prospects.
The analyst expects that will eventually trickle right down to Boeing’s valuation, in addition to some suppliers.
“We feel Boeing is increasingly trading like a cyclical stock, which is the historical pattern, and less on the secular free cash flow growth story,” Herbert said.
