Sometimes the signals get crossed, making it difficult for investors to know if a stock will head up or down. Will defective products make an incurable hit to a company’s name? Will poor quarterly earnings push a stock down, despite strong revenues? Will a troubled reputation outweigh an improving outlook?
Here we take a look at three blue-chip stocks which have a mixed outlook right now. That’s down to bullish and bearish factors playing off against each other. So, what does that mean for investors? Let’s see what top analysts have to say about these three key names, and how they are reacting to conflicting signals.
Boeing Company (BA)
Boeing has had its troubles recently, and we’ve been here to report on them. It started back in March, when a 737 MAX 8 aircraft belonging to Ethiopian Airlines crashed just after takeoff, killing all aboard. Turns out, it was the second such accident in less than five months. It didn’t take long for airline regulators worldwide to ground the MAX 8 model until both a cause and fix were known.
Boeing, to its credit, responded quickly. The company suspended deliveries of new MAX 8s, even though the plane is the most popular model of their best-selling airliner. Better yet, within a few weeks announced that they had located the cause of both accidents, a software flaw in the autopilot system, and that they were working on a fix. Boeing took a serious hit to the bottom line, but the company has other production models and was confident that it could get the MAX 8 program back on track during Q3.
Fast forward to the present, the beginning of Q3. Boeing is suddenly facing a much more serious situation, with the FAA delaying certification of the software fix for the MAX 8, and worse, investing both a second problem with the 737 and an unrelated problem with the 787’s assembly facility in South Carolina.
This is a perfect storm of bad news for Boeing, and the details only make it worse. Bloomberg has reported that, to cut the budget, Boeing outsourced coding work on the MAX 8 software to Indian temp workers at $9 an hour, while the Seattle Times newspaper has reported that the US Department of Justice is issuing subpoenas to the South Carolina assembly plant responsible for the wide-body 787 due to allegations of poor quality work. And to top it all off, the FAA has delayed the official testing of the new 737 MAX 8 software until July 8 or later, pushing the plane’s return to service into the fourth quarter at the earliest. With all of this, no one is surprised that BA shares are dropping in the markets this week. The stock closed down 2% on Monday, July 1, at $356, at loss of $7.55 per share.
On the Upside
The surprise comes, however, from Boeing’s resilience in the face of this steady pummeling. BA is up over 10% year-to-date, and continues to receive strong ratings from Wall Street’s analysts. Five-star analyst Myles Walton, of UBS, gives Boeing a ‘buy’ rating, based on evidence that air travel customers are willing to use 737 models. Citing a survey by UBS’ Evidence Lab, Walton says, “A single point in time survey does not capture ongoing consumer sentiment which can change relatively quickly… we did note some improvement in sentiment around consumers’ willingness to fly on a 737 MAX.” Walton gives Boeing an ambitious $500 price target, indicating his confidence in the stock with a 40% upside.
Delving into the complexities of the MAX 8’s recertification for service and resumption of production delivery, Jefferies analyst Sheila Kahyaoglu agrees that MAX 8 deliveries will not restart until Q4. She reduces her forecast for total delivery of the model in 2019 by the 126 aircraft previously expected in Q3, but maintains her belief that the company will deliver 179 planes in the calendar year’s final quarter. In line with the reduced full-year delivery expectation, she lowered her EPS estimate from $14.70 to $12.75. She keeps her ‘buy’ rating on BA, however, saying, “Boeing should be able to recover the lost deliveries once the final fix is in place.”
On a final note, Boeing’s most recent analyst rating, from Kenneth Herbert of Canaccord Genuity, is a ‘hold.’ Herbert believes the delay will impact Boeing more than its supply chain companies, but even here, he sees that impact as limited, with most of the damage already done. He gives BA a price target of $380, with an upside potential of 6.6%.
Overall, BA shares remain a ‘Moderate Buy’ in the analyst consensus, with an average price target of $436. This gives the stock a robust 22% upside from the current share price of $356.
Nike, Inc. (NKE)
Just do it, Nike says, but should you? The popular apparel company just missed on earnings for the first time in seven years, but the stock actually gained in the aftermath, further improving on this year’s 15% gains. Stocks don’t usually gain after a decline in earnings, so what happened?
On June 27, Nike reported Q4 and full year results for FY19. The Street consensus expected EPS of 66 to 67 cents, representing a year-over-year drop of 3 to 4%, but the actual result was worse. Q4 EPS came in at 62 cents, down 10% from the year-ago quarter, and well below the forecast. Quarterly revenue, however, was up 4% to $10.18 billion, and in line with the forecast of $10.20 billion. The revenue numbers included 7% growth in the core North American market, to $4.165 billion, and an impressive 16% growth in the China market to $1.70 billion.
The earnings drop was mainly due to an unfavorable currency environment, with the stronger US dollar costing the company over $1.4 billion on the bottom line, according to CFO Andy Campion. Nike had planned for a stronger dollar, but political uncertainty due to US-China trade tensions and the Brexit situation impacted the currency exchanges more than they had expected.
Despite the trade and tariff tensions, company execs were positively gushing on the potentialities of the Chinese market. Quoting CFO Campion again, “Let’s turn to Greater China, which grew 22% on a currency neutral basis in Q4. This marks the 20th consecutive quarter of double-digit growth in China.”
Mark Parker, Nike’s CEO, elaborated on the company’s successes in China: “The consumer sentiment around NIKE in China has been actually quite strong. We’ve made a lot of effort through the years to connect with the marketplace to take insights to use to drive innovation and messaging that is really, as we said, urban for China. So, we’re seeing that continue. And it’s showing up in the results.” The results, of course, being the 16% revenue growth in Nike’s Greater China market.
What the Analysts are Saying
Nike’s fundamental strength impressed the analysts more than the depressed quarterly results. Robert Drbul, of Guggenheim, stated this explicitly in his note after the earnings release: “We are impressed with the strength in the business and believe FY20 sets up well for another year of top-line outperformance/market share gains, globally, as transformational investments continue to gain traction. Fundamentally, NKE remains one the most attractively positioned names…” He gives NKE shares a price target of $100, suggesting an upside of 17%.
Stifel’s Jim Duffy agreed, saying, “With a return to growth in North America and our view of the athletic category as having long-duration global secular and structural tailwinds, we see NIKE as uniquely positioned to execute to a more direct model… The call left us more optimistic on near-term trends in China, momentum with digital platforms, and long-term margin opportunities…” Duffy’s price target, $96, indicates a potential 12% upside for NKE.
Nike’s shares hold a ‘Moderate Buy’ from the analyst consensus, based on 14 buys, 4 holds, and 1 sell given in the past three months. NKE is selling for $85, so the $94 average price target yields an upside potential of 10%.
Procter & Gamble Company (PG)
Defensive stocks are useful for protecting investment portfolios from market volatility. They tend to overperform in bear markets, but by the same token, they frequently underperform in bull conditions. Procter & Gamble is a classic example. The consumer goods giant, well-known in the self care, home health care, and baby care segments, offers products that customers need, and will pay for, no matter what the economic conditions. It’s a niche that has supported the company since 1837.
The enviable niche position lies behind Goldman Sachs’ recent upgrade of PG from a ‘neutral’ rating to a solid ‘buy.’ The investment bank expects that Procter & Gamble will show higher margins and better profit growth going forward, based on 41% growth so far this year and “room for additional outperformance.”
A Major Upgrade
Analyst Jason English, writing the note for Goldman Sachs, said, “This past year has marked a turn in PG’s market share and organic sales growth. We expect next year to mark a turn in its margin profile and profit growth as relative organic strength sustains… There is a role in investors’ portfolios for a large liquid global staples company such as this and note that PG remains the most underweight US listed mega-cap global CPG company…” English boosted the price target on PG by over 9%, to $125, indicating an upside potential of 13%.
Goldman Sachs is not the only major bank to look favorably on PG shares. Morgan Stanley’s Dara Mohsenian last month raised his price target on this stock to $116, underlining expectations for the company’s continued strong performance.
Like the stocks above, Procter & Gamble has a ‘Moderate Buy’ rating from the analyst consensus, based on an even split of 6 buys and 6 holds. The stock’s recent strength has pushed the share price, $110, above the average price target, $109, giving it a net downside at the moment. As the analysts above show, however, that average target is likely too low.
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