Boeing Faces Risks in China-US Trade Dispute

Escalation of a trade dispute between China and the US is bringing uncertainty with Boeing (BA) facing substantial risks given that the Asian nation’s tariffs announced this week include levies on the airplane maker’s 737 next generation craft, Canaccord Genuity said.

China’s “very quick response” to the Trump administration includes a 25% tariff on aircraft weighing between about 33,000 and 99,000 pounds, including large business jets, the 737 NG and 737 MAX-7, aerospace analyst Ken Herbert said in a note. Larger airplanes, including the 777 and 787, aren’t currently included, he said.

“Considering the importance of the 737 to Boeing and its free cash flow, the risk for Boeing and the supply chain is substantial,” Herbert said.

Boeing retreated in the recent stock selloff amid news about the US-Asia trade dispute on concerns that the Chicago-based company’s planes could be targeted by the duties. The shares were recovering on Thursday in step with the broader gains in the main measures.

Herbert said Boeing has 27 of its next generation 737 planes in the backlog that are identified for China, and 139 “undisclosed” customers also in the pipeline. China has historically accounted for the “vast majority” of undisclosed orders, the analyst said.

Still, the tariffs are in an evaluation period and Canaccord sees the near-term direct risk to the sector as limited. “We remain confident a negotiated settlement will be reached.” That’s even as areas uncertainties remain, including about how leased aircraft will be handled, Herbert said.

“We believe that the potential for further trade disruption will continue to weigh on the sector, depressing multiples,” he wrote. “We continue to favor stocks with commercial aftermarket exposure and defense stocks over stocks that are more leveraged to the original equipment cycle.”

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