Thursday, December 1, 2016

What Could Go Wrong for Boeing Under a Trump Administration?

After every U.S. election, the losers very likely ask themselves, “Well, what’s the worst that could happen?” Should Boeing be asking itself that same question?

Boeing is the country’s largest manufacturing firm and its largest (by revenue) exporter of finished goods. During his campaign, President-Elect Donald Trump made trade a centerpiece of what he plans to change as soon as he takes office. He took particular aim at China, claiming that the United States and China are already in a trade war and that the United States should use what he called its “economic power” over China.

From Boeing’s point of view, there are significant dangers to the company’s business if Trump should make the wrong choices on trade. Between 2000 and 2015, Boeing delivered about 5,500 new commercial jets to foreign customers. That’s about 73% of all its deliveries during those years.

According to industry analyst Richard Aboulafia of the Teal Group, the percentage of Boeing’s new airplanes that are exported has risen from about 54% in 2000 to 80% in 2015. Deliveries to U.S. airlines in that period fell by a 2.4% compound annual growth rate (CAGR). Deliveries to non-U.S. operators and lessors grew by a 6% CAGR.

And while Boeing’s international customer base is important, Aboulafia also notes the “elaborate global supply chain networks” on which aircraft manufacturers depend for transfer of parts from all over the world.

As is almost always the case in any political undertaking, making the least amount of change and trumpeting it as a major win is probably the best outcome. If Trump leaves trade agreements and bodies like the World Trade Organization (WTO) as they are but takes a somewhat harder line in negotiations, Boeing may have to adapt but it won’t be seriously affected.

However, if a Trump administration imposes tariffs and other barriers to trade, especially targeted at China, Aboulafia believes this is “the greatest risk for Boeing.” Nearly 20% of the company’s 2015 deliveries were made to Chinese buyers, and a threatened 45% tariff on all Chinese imports would certainly provoke a response from China that would not be in Boeing’s best interests.

Trump has promised to withdraw from the Trans-Pacific Partnership and at least to renegotiate the North American Free Trade Agreement (NAFTA). The new administration also could choose to ignore WTO rulings such as the one handed down recently in a dispute between Boeing and Airbus over illegal subsidies.

Since the November 8 election, the dollar has risen more than 10%, and that decreases the buying power of Boeing’s foreign customers. Another blow to Boeing would be the loss of the U.S. Export-Import Bank that already had been the target of conservative legislators as well as the president-elect.

One bright spot may be expected increases in defense spending under a Trump administration. That would certainly help, but Boeing’s 2015 revenues from its defense and space division totaled less than half its commercial jet revenues. Even the company’s planned expansion of its services business would not bring overall revenues if the worst outcome should be realized.

Boeing’s stock posted a new 52-week high of $152.11 on Tuesday, nearly a buck a share above the 12-month consensus price target of $151.22. The 52-week low is $102.10.

(Paul Ausick - 24/7 Wall St.)

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