Boeing: Ready to Take Off

Boeing (BA) has underperformed the market since Jan, but may be ready to make up the shortfall.  Earnings are on a nice upwards trajectory with BA earning $7.71 in 2015.  Management forecasts 2016 EPS at $8.15 to $8.35. BA is expected to earn $9.53 next year and $10.23 in 2018. This would equate to a 3-year EPS growth rate of 11% to 12%.   

The first-quarter 2016 report was better than expected, but more charges against the Air Force tanker and 747 programs cost the company $0.24 in EPS. Still, Boeing continued its buyback program ($3.5 billion in the first quarter) and continues to pay its quarterly dividend of $1.09 per share (a yield of 3.33%). From a shareholder’s point of view, those are solid reasons to like and own the stock.

Since January, BA has underperformed the S&P 500.  From June 2014 to this past January, BA performance has mirrored the overall index.  However, in the 1st qtr, BA declined from $140 to under $110, and has clawed its way back to $135.  Nonetheless,  BA should be a minimum of 10% higher if it were to match the index’s performance.

S&P Capital IQ recently trimmed their full-year 2016 earnings per share estimate from $8.57 to $8.45.   Even so, the analyst liked Boeing’s $480 billion backlog and said the backlog is “supportive of top and bottom line growth.” S&P is also “positive on the aggressive share buyback program and 3.3% dividend yield.”

S&P is not the only analyst reporting on BA.  Below is a sampling of recommendations and price targets from various Wall Street firms:

·         S&P Capital IQ rates BA a Buy with a price target of $160.

·         Bernstein raised its price target from $180 to $184.

·         Morningstar has a 3 Star, Neutral, with a Fair Value of $140.

·         Canaccord lifted its price target from $135 to $140 and rates the stock at Hold.

·         JPMorgan raised its price target from $120 to $140 with a Neutral rating.

·         RBC upped its price target from $128 to $132 with a Sector Perform rating.

·         SocGen raised its price target from $129 to $140 and has a Hold rating on the stock.

·         Merrill Lynch offers an underperform rating.

·         Goldman Sachs has a Sell rating on the stock but raised its price target from $100 to $101.

Management generated free cash flow (operating cash flow less capital expenditures) of $6.91 billion in 2015 and $7.88 billion on a trailing 12 month basis after reporting 1st qtr. 2016 results.  Management has pegged free cash flow for 2016 at $7.2 billion. 

Boeing has been buying back large amounts of its shares.  After peaking in 2013 at 767 million shares, the company has bought back 100 million shares, with 665 million shares outstanding in the 1st qtr. 2016.  This represents a reduction of 13% in shares outstanding and around $1.00 in increased earnings per share.    

On the positive side of share ownership is the current backlog of 5,700 commercial airplanes.  This provides future growth visibility and a floor for operating cash flow over the next five years.   BA’s marketplace should continue to experience an underlying 5% annual air travel growth.   The recent moves to rework the 737 and 777 aircraft rather than develop entirely new planes has saved BA billions in development costs.  It has been reported BA is looking at another generational variation of the single-aisle 737.  With a change in Administrations, the slump in defense spending may be coming to an end.  BA could be well positioned to capture a larger share of increased defense spending.   

In addition, management is starting to emphasize the total customer approach to the sales cycle. In the past, BA tended to leave the aftermarket for parts to their vendors and suppliers.  With the huge backlog and increasing inventory of planes in the field, management has begun to focus on the “life cycle” approach to its business.  This involves both maximizing new product orders and capturing a bigger piece of the aftermarket opportunities.  The impact on BA’s vendor relationships will be an interesting topic to follow.  

On the negative side, some believe the current airplane replacement cycle may be topping out and new order comparisons may begin to falter. Low jet fuel prices are delaying some airlines from upgrading their fleet.  Delta Airlines, for example, has slowed its pace of plane replacement as the cost to operate older, less fuel efficient planes is not as much of a burden as when jet fuel pricing was much higher.  Plus, there continues to be stories of a Chinese-made airplane to compete with the Boeing 737 and Airbus A320.     

There are pictures of the debut of the first single-aisle Chinese-made commercial aircraft known as the C919. While the major components are produced by either foreign companies or Chinese joint ventures, the C919 currently has orders for over 500 airplanes. The C919 is expected to be put in service in 2019 in the domestic Chinese air travel market.    

Although not directly affecting BA, a separate state-owned company also has developed a smaller regional jet, the ARJ-21, to compete in the market dominated by Brazil's Embraer and Canada's Bombardier. 

Investors looking for an industrial and aerospace/technology stock which has lagged the market but still offers reasonable value should review Boeing.  There is a lot to like about BA from its earnings growth potential to its current and growing income yield.

This article first appeared in the May 2016 issue of Guiding Mast Investments.  Thanks for reading, George Fisher