US stocks broadly fell yesterday, following the resignation of Gary Cohn, the economic adviser to President Donald Trump. Cohn, a former top executive at Goldman Sachs, as opposed to the idea of slapping tariffs on steel and aluminum imports. One of the stocks which were hammered was Boeing Company (NYSE: BA), as aluminum makes up nearly 80% of the older model planes such as 737 and 777.
Even a tariff rise will not have much of an impact on the overall price of an aircraft. Therefore, Boeing may not be affected because of a slight increase in the cost of production. However, as explained below, retaliation from other countries may severely affect the prospects of Boeing. Therefore, the stock is expected to remain bearish in the days ahead.
The planned tariffs on imported steel and aluminum would hardly increase the price of a Boeing’s jetliner or fighter plane, according to analysts. They have pointed out that Aluminium makes up only about 12% of the cost of an aircraft. A 10% increase in aluminum tariff would push an aircraft’s price upwards of only 1.2%, even if all the aluminum used in the manufacturing process is imported. According to aviation experts, Boeing uses mostly aluminum manufactured domestically.
Eric Redifer, a director in the aerospace industry consulting firm AlixPartners, estimated only 25% to 30% of aluminum used by Boeing is imported. Therefore a 10% increase in tariffs could lead to a 0.3% increase in the cost of a Boeing aircraft. This represents a mere $200,000 increase in the price of a mid-sized 737 aircraft worth $117.10 million.
To clinch large deals, aircraft manufacturers usually offer deep discounts (even up to 40%). Redifer has underlined that Boeing uses big chunks of aluminum, which is expensive to transport. So, local procurement is beneficial for them.
Kevin Michaels, an aerospace manufacturing expert at AeroDynamic Advisory, clarified that the negative impact of an increase in steel tariff is similar to aluminum. AeroDynamic Advisory is a consulting firm in Ann Arbor, Michigan. Michaels has estimated that a 25% tariff on steel would cost an additional sum of $100 million for the US aerospace companies.
Since the tariffs would roughly have a similar impact, the overall increase in expense for the aerospace companies would be in the range of $150 million to $200 million or 0.2% of the $100 billion worth of aircraft (passenger as well as military) manufactured by the US companies in a year.
The analyst has pointed out that Boeing would incur a much lesser cost in the case of the new generation 787 as the wings and fuselage are made up of carbon-fiber composite. Michaels has estimated that the cost of a Boeing 787 would increase by a mere 0.09% due to Trump’s tariff plan.
The main issue, according to analysts, is not the increase in material costs, but the possible retaliation from the customers of Boeing, which sells almost 70% of its aircraft outside the US. Last year, China bought nearly 22% of aircraft (model 763) sold outside the US.
If China retaliates by placing orders to only Airbus, the European competitor, then it would begin to have a severe negative impact on the revenues of Boeing. Considering the problems that may arise in the future, investment research firm Vetr has downgraded the stock to “hold”, from the prior “buy” rating. All these factors have turned the sentiment bearish towards Boeing.
Technically, the stochastic oscillator is declining after moving out of the bullish zone. The stock of Boeing is also facing resistance at 350. Therefore, a downtrend is expected.
In order to gain from the impending decline, we may acquire a put option contract, which is valid until March 16. One of the important conditions to be satisfied to enter a trade is the stock of Boeing should be trading at about $350 on the NYSE.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
