Boeing (BA) Stock Went Up in Years of BCA Headcount Reductions, Says Deutsche Bank

Deutsche Bank earlier reiterated a Buy rating on Boeing (NYSE: BA) and price target of $160. In a research note, analyst Myles Walton discussed the historical relationship between share price and Boeing Commercial Aircraft's headcount moves -- noting that the stock went up in 8 of the last 9 years of BCA headcount reduction actions. In the analyst's view, productivity is rewarded and by the time the headcount actions are taken, most of the bad news is baked in.

Walton explained, "In the last 18 years (since the McDonnell Douglas merger), Boeing has increased its headcount at Boeing Commercial Aircraft in 9 of those years and decreased it in 9 of those years. In the 9 years of employment expansion, shares of BA lagged the market in 5 and outperformed in 4. However, in the years where headcount fell at BCA, shares of BA outperformed the S&P500 in 8 of the 9 years with the only exception being 2001. With 2016 YTD performance already lagging the market by 10%, maybe 2016 will be the other exception, but to us the cost actions look like mgmt moves to get to 10% BCA margins."

"The Seattle Times is reporting employee reductions at BCA with an internal target of 4,000 fewer employees by June at BCA. The mechanism of the decline would be attrition and voluntary buy-outs. Per Boeing’s website through February, 1500+ of the headcount reduction has already taken place. Across the entire Boeing enterprise, employment is down 2,448 since YE highlighting efforts beyond BCA as well. Given the lower production on the 747 and 777 coupled with the higher automation activity and improved performance on the 787, a downtrend is likely to continue, which should be a significant boost to productivity," continued the analyst.

Walton added, "In Feb, the head of BCA messaged to employees the need for cost action to counter competitive pressures and the lower pricing has certainly been realized in some of the recent order campaigns. In our view, the lower headcount is to address that competitive dynamic, but we also think part of the move is how mgmt is trying to drive BCA margins to 10% in 2017. A 10% margin for BCA in ’17 alongside the effects share repo would yield a mid-teens EPS growth before considering the likely 4% additional top-line growth in ’17 vs. ’16."

For an analyst ratings summary and ratings history on Boeing click here. For more ratings news on Boeing click here.

Shares of Boeing closed at $128.58 yesterday.

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