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Introduction

Boeing (NYSE:BA) remains a compelling investment opportunity despite all the overblown hype around the failed Boeing 787. Yes, the engineers were overconfident, I am certain we can all agree upon that, but what I disagree with is how media outlets have overblown the negative consequences the Boeing 787 may have to the company and shareholders. Ultimately I am highly optimistic on Boeing's future.

Qualitative Analysis

Source: Information pertaining to BA came from the shareholder annual report, shareholder quarterly report, Boeing Investor Presentation, Schlumberger Investor Presentation, along with YCharts.

The Boeing 787 has caused some severe reputation damage as Felix Salmon from Seeking Alpha cautiously notes:

Twice in 58,000 hours of usage, the lithium batteries on the new 787 contrived to catch fire; this is obviously not something, the FAA - or even Boeing, for that matter - can risk happening again. There's only one thing to be done: all lithium batteries on the 787 must be swapped out for nickel-cadmium or lead-acid batteries, which have the great advantage that they don't catch fire.

Felix pointed out that there might a market for nickel-cadmium batteries. I am just kidding. The main idea is that the problem is easily solvable and that Boeing already has a simple go-to method to get rid of the problem, the use of nickel-cadmium batteries. I am sure the nickel-cadmium batteries generally have smaller life-cycles but in return are much more stable, which is a huge factor to airplanes, as the life span of an airplane is extremely long, the component failure rate must be extremely minimal. In this case, the problem was identified well before passengers ever got onto a plane, which is good.

Boeing has an extremely large backlog of orders. Currently, the net orders for airplanes are $114 billion with a backlog of approximately $390 billion. This type of backlog is not typical, which can be clearly seen by the piling inventory figure.

(click to enlarge)

Boeing's days' in inventory have rapidly climbed following the recession of 2008. This is primarily driven by the rising demand for the airplane and the limited capacity to produce and manufacture airplanes. The inventory is not the number of airplane's that are sitting on Boeing's balance sheet but rather the raw materials and components of an airplane that have not been assembled into an airplane. In other words, the company is not operating at full production capacity. The figure above also shows that the Boeing Days' Inventory is starting to decline throughout the fiscal year 2012; this implies that Boeing's production output is increasing, which is declining the inventory balance on the balance sheet. This will result in higher recognition of revenue, in the immediate future. When a company has higher inventory levels, this is generally indicative of higher earnings and revenues in forward years as revenues become recognized at the completion of each airplane.

(click to enlarge)

Following 2009 the capital expenditure spending on Boeing's income statement has declined between 2009 and 2010. As orders and inventory started piling up, Boeing has reinstated higher capital expenditure in order to improve the production rate of the airplane along with developing and creating new passenger airplanes that are more fuel efficient such as the Boeing 737 MAX. The Boeing 737 MAX is expected to have a fuel economy that's 19% lower than today's main competitors. Lower fuel economy is a huge driving factor behind the airline's purchasing decisions, and it is making decisive impact on the backlog orders Boeing is currently facing.

(click to enlarge)

The current operating margins are the best I have ever seen for Boeing over the course of this decade. The operating margin improvements have to do with superior products, better management over the manufacturing of its products, along with the shortage of supply for airplanes (hence the large backlog).
The income elastic demand of Airline travel is 5.82. This means that, for each percentage increase in income, consumption of travel will increase by 5.82 times. This is an important indicator as Boeing's net income from foreign markets will continue to grow and will represent a larger percentage of net income going forward. In 2010, income GDP per capita worldwide was at $7,329-- by 2020, this is forecasted to be at $9,388. Income on a worldwide basis is likely to grow by at least 28% over the decade. This improvement in income will make for more airplane travel and will contribute to Boeing's revenue growth by an additional 162.96% over a 10-year period (16% per year). This may be the primary reason for why airlines have such high demand and why Boeing has such a large backlog of airplane orders.

(click to enlarge)

According to Schlumberger, the worldwide GDP is projected to grow at 3.5% for 2013, and 3.9% for 2014. This implies that Boeing's economic environment is both stable and will continue to improve going forward. It is also anticipated that the eurozone will exit out of recession by the end of 2014 barring any unforeseen circumstances. This should keep investors optimistic on European airplane sales going forward.

Technical Analysis

Boeing stock seems to have broken out of a major channel. I have to remain optimistic on the upwards momentum in the price of the stock due to both strong fundamentals and favorable economic conditions.

(click to enlarge)

Source: Chart from freestockcharts.com

The stock is trading above the 20-, 50-, and 200- Day Moving Averages. The stock has broken the upper trend line of the symmetrical triangle formation. The stock will appreciate over the long-term, and is in the beginning stages of a multi-year up-trend.

Notable support is $56.00, $66.00 and $75.00 per share. Notable resistance is $86.90, $97.50 and $105.00 per share.

Street Assessment

Analysts on a consensus basis have reasonable expectations for the company going forward.

Growth Est

BA

Industry

Sector

S&P 500

Current Qtr.

23.80%

6.60%

75.40%

10.50%

Next Qtr.

23.60%

28.60%

27.50%

16.20%

This Year

25.00%

44.00%

27.70%

8.10%

Next Year

13.00%

3.30%

-11.60%

12.80%

Past 5 Years (per annum)

0.81%

N/A

N/A

N/A

Next 5 Years (per annum)

11.78%

11.08%

13.39%

9.03%

Price/Earnings (avg. for comparison categories)

13.24

12.47

18.73

21.01

PEG Ratio (avg. for comparison categories)

1.12

1.99

1.33

2.16

Source: Table and data from Yahoo Finance

Analysts have reasonable expectations, as analysts on a consensus basis have a 5-year average growth rate forecast of 11.78% (based on the above table). This growth rate is above the industry average for the next five years (11.08%).

Earnings History

12-Mar

12-Jun

12-Sep

12-Dec

EPS Est

0.94

1.12

1.13

1.19

EPS Actual

1.22

1.27

1.35

1.28

Difference

0.28

0.15

0.22

0.09

Surprise %

29.80%

13.40%

19.50%

7.60%

Source: Table and data from Yahoo Finance

The average surprise percentage is 18% above analyst forecast earnings over the past four quarters (based on the above table).

Forecast and History

Year

Basic EPS

P/E Multiple

2003

$ 0.90

38.23

2004

$ 2.33

18.44

2005

$ 3.27

18.12

2006

$ 2.89

26.33

2007

$ 5.38

14.13

2008

$ 3.70

10.26

2009

$ 1.86

26.89

2010

$ 4.49

13.76

2011

$ 5.39

13.2

2012

$ 5.15

14.54

Source: Data from YCharts

The EPS figure shows that throughout the 2003-2007 period, the company was able to grow earnings. Throughout 2007-2009 earnings declined. The decline in earnings was due to the great recession. Following the recession, from 2009 onwards the company was able to grow earnings.

(click to enlarge)

Source: Data from YCharts

By observing the chart we can conclude that the business is cyclical and is affected by macroeconomics. Therefore one of the largest risk factors to BA is the slowing of international gross domestic product growth. So as long as the global economy continues to grow, the company will generate reasonable returns over a 5-year time span based on the forecast below.

(click to enlarge)

By 2018 I anticipate the company to generate $11.22 in earnings per share. This is because of a product refresh cycle, improving global outlook, cost management and continued development overseas.

The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next five years.

(click to enlarge)

Below is a price chart incorporating the past 10 years and the next 6 years. Detailing 16 years in pricing based on my forecast and price history on December 31st of each year.

(click to enlarge)

Source: Data from YCharts and price history is from Yahoo Finance.

Investment Strategy

BA currently trades at $86.43. I have a price forecast of $92.20 for December 31st 2013. The stock is currently trading below valuation, and should be bought at pull backs as a part of a longer-term accumulation strategy.

Short Term

Over the next 12 to 24 months, the stock is likely to appreciate from $86.43 to $105.00 per share. This implies 21.5% upside from current levels. The technical analysis indicates a long-term up-trend. While the previously mentioned price forecast using fundamental analysis further supports the assessment.

Investors should buy BA at $86.43 and sell at $105.00 in order to pocket short-term gains of 21.50% between 2013 and 2014.

Long Term

The company is an exceptional investment for the long term. I anticipate BA to deliver upon the price and earnings forecast despite the risk factors (competition, regulation, economic environment). Boeing's primary upside catalyst is international expansion, product development, share buy-backs, and cost management. I anticipate the company to deliver upon my forecasted price target of $176.40 by 2018. This implies a return of 120% (including dividends) by 2018. This is a great return for a Aerospace & Defense stock.

Year

Dividend Yield @ $86.43 per share

Cumulative Total

2012

2.24

2.24

2013

2.34

2.34

2014

2.45

4.79

2015

2.56

7.35

2016

2.68

10.02

2017

2.80

12.82

2018

2.92

15.74

A higher-yielding investment opportunity albeit having higher risk is to buy the Jan 17, 2015 calls at the $90.00 strike. The call premiums trade at $7.00. The price forecast for the end of 2014 is $105.00. The rate of return if the calls expire at $105.00 is 114%, the option will break-even when the stock trades at $97.00.

The risk-to-reward on the option is not very compelling. The risk however is reasonable (1.2 beta).

BA has a market capitalization of $65.4 billion; the added liquidity makes this an investment opportunity appropriate for larger institutions that require added liquidity.

Conclusion

Reach for the sky, the sky is the limit, and Boeing roams the skies. The conclusion is simple: Buy Boeing.

Source: Boeing: The Sky Is Full Of Money Trees