The Dow Jones Industrial Average (DJIA) hit an all-time high on Thursday, July 11, doubling down on Friday to end the week at 27,332. The rally came as Fed chief Jerome Powell made statements widely interpreted as supporting further interest rate cuts in the near-term. Regarding the economic situation, he said, “The bottom line is the uncertainties around global growth and trade continue to weigh on the outlook and inflation continues to be muted, and those things are still in place.”
With the Fed signaling lower rates ahead, investors naturally moved toward stocks. We’ve looked into TipRanks’ database to find three stocks that are leading the Dow’s gains, to drill down into specifics and find out if they still have room to grow in 2H19.
Boeing Company (BA)
Seems you can’t keep Boeing out of the news these days. The industrial giant, the world’s largest aerospace firm and the US’ largest manufacturing exporter, has had more than its share of bad headlines in recent months.
It started with the crash, back in March, of an Ethiopian Airlines 737 MAX 8 airliner, with the deaths of all on board. It was the second crash of that model aircraft in less than five months, and on close investigation both accidents were attributed to the same flaw in the autopilot software. Airlines and industry regulators around the world reacted by grounding all operating 737 MAX 8 aircraft, globally. The result was both a business and public relations disaster for Boeing, as the company has struggled to reassure the public, build a fix for the software, and cope with a production line shutdown of its best-selling airliner model.
But there is also good news. On the macro level, Boeing is one of just two major international manufacturers of commercial airliners, which limits the damage in lost customers. Also, despite some setbacks, Boeing is working on a viable fix for the for the software problem and predicting that the 737 MAX program will return to full production by the end of the year. The company has only had to close one production line. While the MAX 8 is the most popular model of Boeing’s most popular airliner, other 737 models remain in production, and the company’s wide-body airliners were not affected. And finally, with a market cap of $200 billion dollars, Boeing quite simply has the resources to weather this storm.
Boeing’s investors can also take heart from the company’s stock performance since the March air crash. In the two trading sessions following the disaster, BA shares fell from $420 to $373, loss of 11%. But that has been the worst of the damage. BA stock has been essentially range-bound since then, with a high point of $393 and a low point of $337. Shares are currently priced at $365 and rising.
Wall Street’s top analysts agree that Boeing has a clear path out of its current difficulties. From UBS, Myles Walton points to recent survey evidence that the traveling public is growing more willing to book seats on the 737 MAX. While acknowledging that consumer sentiment can be fickle, Walton sees this as evidence that the public will welcome the popular airliner’s return and justify the company’s continuing production. He gives BA a $500 price target, suggestive of a 36% upside.
Vertical Research analyst Robert Stallard agrees that Boeing is a buy and that the 737 MAX will return to full production, although he sees that happening toward the end of the year. In a recent note, in which he gives the stock a $413 price target, Stallard says, “Boeing is having to do additional work on the MCAS software system… We had previously assumed a 6-month grounding in our Boeing estimates, taking the MAX out of action through to the end of 3Q19. We are now updating our numbers to factor in another quarter of grounding to the end of 4Q19…” Stallard’s price target indicates an upside potential of 13%.
Finally, Cowen’s Cai Rumohr, an expert on the aerospace sector who has been following Boeing for over 10 years, has consistently maintained his ‘buy’ rating on BA since the March crash. Earlier this spring, Rumohr noted that Boeing had only had four net cancellations in the immediate aftermath of the groundings, evidence of the company’s fundamental strength. He has held steadfastly to his $460 price target on BA, believing that it will break out later this year. That price target suggests an upside of 25% for the stock.
Boeing’s strong buy analyst consensus rating reflects the overall optimism and the company’s strong fundamentals. It’s significant to note that even the low-end price target, $367, is higher than the stock’s most recent close at $365. The average price target of $433 suggests that BA has a potential upside of 18%.
United Technologies Corporation (UTX)
United Technologies is another large-cap industrial standby, a major manufacturer in a variety of industries: HVAC, building systems, fire and security, elevators and escalators, and aerospace systems such as aircraft engines. UTX’s big news in recent months was the June 9 announcement that it has agreed with Raytheon to merge the two companies’ aerospace and defense segments into a new entity to be called Raytheon Technologies Corporation.
Assuming approval of the merger, the new company will be the world’s second largest contractor in the aerospace and defense sector – after Boeing. And this brings us to an interesting point, underlining the different strengths that companies will show in the market. Where Boeing is generally perceived as a strong buy (see above), UTX is still seen as a moderate buy from the analyst consensus. But while the analysts’ optimism about Boeing is conditional on the 737 MAX restarting production in Q4, the outlook on UTX is showing strong improvement. Two five-star analysts have recently upgraded the stock from neutral to buy.
The first upgrade, on June 10, came from Josh Sullivan of Seaport Global. Pointing to the Raytheon merger, Sullivan said it, “offers a compelling combination in defense as well as commercial aerospace business.” He specifically points out the proposed new company’s ventures in hypersonic and directed energy weapons as putting it “ahead of the curve” in defense industry trends. He believes the combination is sufficient to support a $165 price target for UTX. Sullivan’s target suggests an upside of 23% to the stock.
The second, more recent, upgrade to UTX came on June 24 from Cai Rumohr, quoted above regarding Boeing. Rumohr notes that UTX dropped in the immediate aftermath of the announcement and has only now edged above its June 9 trading level. He says this puts UTX’s aerospace unit “at an inflection point,” with further gains possible if the merger is approved. He adds that, “the stock’s relative weakness since the merger was announced suggests investors don’t understand the benefits,” and describes UTX, at its current price, as a “win-win for attractive standalone valuation.” Rumohr puts a $150 price target on the stock, indicating room for a 12% upside.
As mentioned, the analyst consensus on UTX is a moderate buy. This is based on 6 buys and 3 holds given in the past three months. Shares are selling for $133, and the average price target of $150 suggests an upside potential of 12%.
Johnson & Johnson (JNJ)
With Johnson & Johnson, we shift gears from industry and defense to pharmaceuticals and consumer products. JNJ is best known products like Band-Aids, Tylenol, and no-more-tears baby shampoo, but the company’s main revenue stream comes from is pharmaceutical line. To illustrate the difference in revenues between the segments, consumer/home health supports just under 17% of JNJ’s total revenues, while just two drugs – Remicade and Simponi – bring in over 11% of the total revenues by themselves.
Whatever the base, Johnson & Johnson’s healthy revenues and reputation as a defensive stock that will outperform the market in a downturn keep it popular with investors. The company has shown a 24% return on equity over the trailing 12 months, along with positive trends in the 20- and 200-day moving averages. In the last quarterly report, JNJ beat the forecast by 3.3%, and in the coming report, to be released on July 16, is expected to show 15% year-over-year EPS growth.
The analysts agree that JNJ is a stock with strong growth potential. Writing at the end of May, BMO’s Joanne Wuensch gave the stock a buy rating with a $157 price target, basing her outlook on an optimistic take regarding an opioid addiction case currently in litigation. Wuensch notes, “Litigation is a common occurrence in the health care sector that takes significant time to resolve, and often headlines are worse than reality.” She adds that Johnson & Johnson has offered a vigorous defense in the case, and adds that, having waived a jury trial in favor of a bench hearing, JNJ could look forward to the case’s completion by summer’s end, making it possible for the company to put the matter behind it fairly quickly. Her price target reflects her optimism, suggesting a 16% upside.
Matt Miksic, of Credit Suisse, also weighed in on JNJ, initiating his coverage of the stock with a buy rating. He says the “key drivers” behind the stock are “continued growth in Immunology, driven by Stelera and Tremfya, sustainable growth in Oncology driven by Imbruvica, Darzelex and Erleada, and an attractive pipeline of filings in the 2019-2023 timeframe with greater than$1B potential each, and stable growth and cash flows in Consumer Health.” His price target, $156, like Weunsch’s, also indicates confidence in a 16% upside.
Johnson & Johnson’s overall rating is almost identical to UTX’s. JNJ receives a moderate buy from the analyst consensus, based on 7 buys and 4 holds, with a current share price of $134 and an average price target of $150. The upside potential is 12%.
Use TipRanks’ database to find out what Wall Street’s top analysts are saying about the market’s leaders, to target your investments appropriately.
