RBC On Boeing: Is The Emperor Naked?

• Shares of Boeing Co (NYSE: BA) tumbled on Thursday following reports that the company faces an SEC investigation.
• Robert Stallard of RBC Capital Markets maintained a Sector Perform rating on Boeing with a price target lowered to $128 from a previous $135.
• Stallard not that the SEC is now "taking a close look" at the company following years of not raising any objections.

Shares of Boeing tumbled to a new 52-week low of $102.10 on Thursday after reports surfaced that the company faces an SEC investigation related to its use of the "program accounting" method.

Robert Stallard published a report on Friday titled "The Boeing Company: Is The Emperor Naked."

According to Stallard, Boeing has been using the same accounting method for "ages" and is not believed to have been investigated by the SEC in the past. The analyst noted that the investigation is likely focusing on the "scale of the miss match" between profits and cash on the 787 (deferred cost balance of $29 billion) and further major charges on the 747-8 as the aircraft "has failed to sell."

Related Link: Suspicious Of Boeing After SEC Probe? So Is Deutsche Bank

"If Boeing's forecasts are accurate, it has to generate $29bn of cash on the 787 on the current program block to justify the scale of the asset on the balance sheet, and the profit booking rate in the P&L," Stallard explained. "We imagine the SEC is taking a close look at that forecast, especially if Boeing's internal documents cast doubt on this."

Bottom line, Stallard acknowledged that while no one can accurately forecast the outcome of the SEC investigation, the headline risk is nevertheless a "negative overhang."