Boeing’s Direct Exposure to China Trade War May Be Overblown

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Shares of the Boeing Co. (NYSE: BA) were hit hard on Wednesday as retaliatory tariff announcements from China are set to include aircraft, along with the other real-economy items that will matter to American industry. What is interesting about trade wars and tariffs is that the end result, barring actual wars or trading bans, is that not all the business actually gets lost.

A look through the Boeing 2017 annual report shows that worries about China’s loss of future business could at some point be overblown. This does not imply that Boeing’s shares have no risk at all, and it would be more than foolish to assume that Boeing’s stock performance was going to immediately return to the growth patterns seen throughout 2017 and the start of 2018.

Before going too deep into Boeing’s exposure to China, we have to consider that major macroeconomic issues never exist in a vacuum. It is important to look beyond just a one-nation issue here, as President Trump has not only targeted China in other tariffs. China is the issue at hand today, but what if other nations become part of the trade wars with retaliatory tariffs? And investors also should consider that Boeing’s stock price was already down over 15% on Wednesday morning from its all-time highs from recent weeks.

It is also important to understand that Boeing already has competition from China and other new entrants on top of ongoing strong competition among commercial jets and defense contractors. Its 2017 annual report stated that the company faces aggressive international competitors who are intent on increasing their market share. And the strong Airbus, Embraer and Bombardier competition is already facing other entrants from Russia, China and Japan.

An internal search of Boeing’s user-defined reports shows orders for all dates sorted by customer and/or country. Since the beginning of time, Chinese airlines have ordered 1,690 Boeing airplanes and the company has delivered 1,389. Air China, for example, has just two planes undelivered.

The 2017 Annual report also offers a look at Boeing’s total revenues, including foreign military sales, shown by customer location and by year as follows:

  • 2017 total revenue was $93.39 billion, and China was 12.75% of that at $11.91 billion.
  • 2016 total revenue was $94.57 billion, and China was 10.90% of that at $10.31 billion.
  • 2015 total revenue was $96.11 billion, and China was 13.05% of that at $12.55 billion.

Boeing’s 2017 annual report said as well:

Revenues from the U.S. government (including foreign military sales through the U.S. government), primarily recorded at BDS and BGS, represented 31%, 23% and 27% of consolidated revenues for 2017, 2016 and 2015, respectively. Approximately 5% and 4% of operating assets were located outside the United States as of December 31, 2017 and 2016. The information in the following tables is derived directly from the segments’ internal financial reporting used for corporate management purposes.

Again, it would be a fool’s message to say that Boeing has no real exposure and no risks tied to China. That said, the three-year average of its revenues from China is 12.2% of total revenues, and it should be assumed that there is almost no way that 100% of that business will be lost in a trade war and in retaliatory tariffs.

The larger question that remains is about what might happen if China’s response becomes a blueprint for other nations as their way of fighting back in any future trade war or retaliatory tariffs. That would be an entirely different situation, and frankly it would make the China risk feel like a drop in the bucket. To prove the point, Boeing shows that international sales are driving its total revenues, with more than 70% of total backlog represented by international customers, and about 70% of Boeing’s commercial airplane revenues historically come from customers other than in the United States.

Thomson Reuters consensus estimates have total revenues rising to $97.1 billion in 2018, $102.7 billion in 2019 and to $110.5 billion in 2020. Those revenue expectations could come under some pressure if China’s retaliation is carried out, and those estimates could come down handily if this sort of response is taken by other nations as well in the quarters or years ahead.

It is also important to consider that Boeing could be hurt by other tariffs from goods traveling in either direction. The company does import parts from Chinese, Asian and European suppliers that are then used to make its airplanes. And many of those are included on the list of U.S. tariffs.

Boeing shares were last seen down 3.7% at $318.50, but that was after a low of $311.88 earlier in the morning. They have a 52-week trading range of $175.47 to $371.60, and the consensus analyst target price was last seen at $386.83.