It’s no secret that the markets overall are on a tear. The S&P 500 is up 15.1% year-to-date, while the NASDAQ is up 17.7%. Investor profits are following suit, unemployment is low, and times are good.
We’d be fools not to admit all of that, but equally foolish to ignore some clouds gathering off in the distance, a spot of fog here, a patch of mist there. It hasn’t coalesced yet, but warning signs are showing up. We’ll open up the TipRanks database and take a look at three of those warnings, major companies that are sending out bearish markers in the boom. Some of these markers apply to the economy at large, while others are very much company-specific, but there’s plenty to learn from the flashing yellow lights.
Boeing Company (BA)
First up is the world’s largest aerospace corporation, the fifth-largest defense contractor, and the United States’ largest exporter. Boeing has long been a staple of investing portfolios, offering steady profits, reliable equity gains, and an excellent dividend. But this past March, BA shares dropped sharply and have been unable to regain traction since.
The immediate reason is well known: the March 10 crash of an Ethiopian Airlines 737 MAX 8 aircraft, the second such crash of that model in less than 5 months. The accident was attributed to the same cause as the earlier October 2017 crash in Indonesia. Everyone aboard each flight was killed, and in the wake of the second accident, the world’s operational 737 MAX 8 aircraft have been grounded.
Boeing has the resources to weather this setback, but is suffering from two exacerbating factors. First, the 737 is the company’s most popular commercial aircraft model, a long-time workhorse in the narrow-body airliner segment, and the MAX 8 is Boeing’s newest and most popular version of this venerable design. Halting production is a major hit to the bottom line. And second, company management has badly handled the PR around the MAX 8.
The production issue is likely to work itself out, given time. Crash investigators – from the airlines, from governments, and from Boeing – have traced the cause of both accidents to a flaw in the autopilot software, and the company says it has already worked out a software patch. Once they have gained regulatory approval, and installed the fix, production and deliver of 737 MAX 8 aircraft can resume.
The second issue, management’s failure at PR, is probably less easy to address. A long report in Forbes magazine, back in March, showed how Boeing’s initial response led to exactly the wrong public perception: that the company was putting liability and profit above lives. More recently, company CEO Dennis Muilenburg, referring to the MAX 8, said on June 17, at the Paris airshow, “We’ll get it back in the air when it’s safe.” While emphasizing the right them – safety and lives – his statement is still taken as tacit admission that the company was in the wrong.
The result can be seen in both product sales and market performance. Boeing recorded a total of 0 new orders on the first day at Paris (while competitor Airbus tallied 123), and BA shares are down 15.7% since March 8 (the last trading session before the Ethiopian Air accident). News coverage of Boeing has been decidedly negative over past weeks, with TipRanks data showing that bearish articles make up 61% of the total. Unsurprisingly, investor sentiment is also negative, with individual portfolios in the TipRanks database showing a net pullback from BA.
Despite all of this, a majority of Wall Street’s analysts see hope for Boeing. Bottom line, there are only two mega-cap commercial airliner producers in the world, and Boeing is the larger of them. This is a company that is, literally, too big to fail. With that in mind, Cowen’s Cai Rumohr (Track Record & Ratings), a five-star analyst and long-time expert on the aerospace industry, gave Boeing a ‘Buy’ rating and a $460 price target. His target suggests a 29% upside to the stock.
Overall, despite the bearish signals, BA stock still has a ‘Moderate Buy’ from the analyst consensus. The average price target, $436, gives a 23% upside compared to the share price of $354.
Broadcom, Inc. (AVGO)
The microchip industry has been giving mixed signals for years, despite the high profitability of its industry leaders. Broadcom is the world’s sixth-largest semiconductor chip company, with over $18 billion in sales last year, and it just released Q2 earnings, showing year-over-year revenue growth of 10% and an EPS beat of 1%. On the debit side, revenues did not grow enough, as the $5.52 billion reported was almost 3% lower than the $5.68 billion expected. Worse than the revenue miss, however, was the downward revision of full-year revenue guidance, from $24.5 billion to $22.5 billion. AVGO shares slipped almost 8% after the earnings report went public.
Blame China, tariffs, and Trump. There are recent indications of a slowing Chinese economy, and Apple (AAPL) has revised iPhone sales forecasts down to compensate. The widely publicized trade dispute between President Trump and China has resulted in a spate of tit-for-tat protective tariffs which have been impacted trade figures in both countries. At the same time, Trump took action to limit Chinese telecom giant Huawei from purchasing US technology. Approximately 3% of Broadcom’s sales revenue comes from Huawei deals.
Hock Tan, CEO of Broadcom, did not try to sugarcoat the situation, laying it out in the earnings conference call: “We currently see a broad-based slowdown in the demand environment, which we believe is driven by continued geopolitical uncertainties, as well as the effects of export restrictions on one of our largest customers. As a result, our customers are actively reducing their inventory levels, and we are taking a conservative stance for the rest of the year.”
Despite the cautionary tone of Broadcom’s management, the pullbacks from investors, and sympathetic drops in other major chip stocks (INTC lost 1.1%, NVDA slipped 2.4%), top analysts are not ready to call it quits on Broadcom. Tech sector expert Vijay Rakesh (Track Record & Ratings), of Mizuho Securities, acknowledged all of those factors, but still saw reason for optimism: “Looking into 2020, a resolution of geopolitical tensions and bans could drive a mean reversion in stronger demand and inventory build.” Rakesh sets a $330 price target on AVGO shares, for a 24% upside.
Broadcom still has a ‘Strong Buy’ analyst consensus, even after the earnings report, based on 23 buy and 4 hold ratings given over the past three months. Shares sell for $265, and the average price target of $313 gives the stock an upside potential of 17%.
Walt Disney Company (DIS)
Our final bearish signal comes from Disney. The entertainment giant has seen its stocks take off this year, gaining 29% since January. Theme parks and movies, including the enormously successful “Avengers: Endgame,” have kept the company solidly in the black, while operational control of streaming service Hulu and the announcement of the new Disney+ online channel have kept investors and customers alike interested in the company’s future. It looks golden.
Imperial Capital analyst David Miller (Track Record & Ratings) yesterday gave Disney a rare piece of bad news. He downgraded his rating of the stock, from ‘Buy’ to ‘Neutral.’ He offers several points supporting a lower rating to DIS shares:
The core rationale for lowering our rating … is simply due to the fact that the stock has performed consistent with our previous Outperform rating – up by 25.7% since we established that rating on 11/21/18, and ahead of the S&P 500, which is up 7.8% in that same span of time. Most of the catalysts we focused on at the time of that ratings change: the film slate (specifically the release of Avenger’s Endgame), the opening of the two Star Wars lands, the disposal of the Regional Sports Networks (RSNs), the Disney+ analyst day, and the re-financing of the various 21st Century Fox legacy debt tranches, have either happened, or are set to happen, and at a record multiple on 2021 earnings, are pretty much built in to the stock, in our view.
Miller held his price target steady, at $147, which is 4.28% over current trading levels.
So far, Miller is alone in his bearish outlook on DIS. Most analysts are focused on the company’s proven record of generating profits, especially through blockbuster movies. Miller, however, points out an important negative factor going forward, that has not yet sunk into the general consciousness, adding to his above comment: “Disney+ and streaming service Hulu are not expected to break even until 2024.”
Perhaps the most important point here, for investors, is that Disney’s strong gains this year have caught it up to its price target. Where the company had an upside potential above 25% six months ago, the share price of $140 and the average target of $154 now give an upside of just 9.4%. The analyst consensus is still a ‘Strong Buy,’ as DIS has received 14 buys and 4 holds in the last three months.