When the Federal Aviation Administration (FAA) raised concerns over safety issues of the lithium-ion battery used by the 787 Dreamliner manufactured by Boeing Co. (BA), several airlines grounded their Dreamliner aircraft.
However, this did not have any significant effect on the stock price, which rose by about 17% during the last three months. Now with the green signal given by the regulatory authorities to Boeing for the testing of 787, I believe things are back on track for it. What backed the company during this time was strong demand from Asia and its leading position in that region.
The problem that came to light in January cost the company around $350 million and it is still in the process of fixing it completely. There are a lot of uncertainties regarding the time and the cost the company has to forego before it can overhaul it. However, the stock performance of the company remained unaffected by this. It has shown a bullish trend all through this year. The company management has done a good job to maintain the investors' confidence. 'Boeing has high confidence that the proposed fix for the lithium-ion batteries on its grounded 787 passenger jet will work' said Chief Executive Officer Jim McNerney. Besides, there are more factors, which helped the stock to perform positively in the market.
What kept Boeing stock up?
A strong Asian Demand: Around 50 percent of the world population resides and commutes in the Asian region. With an increase in the population and in the per capita income, more people prefer air travel over other alternatives. For airline companies, Boeing and Airbus are the only source to maintain the fleet.
- Boeing's single-aisle aircrafts
What makes Boeing popular? With rising low-cost airlines in Asia, Boeing has come up with its single-aisle aircraft to cater to the needs of airline companies. These crafts are tailor-made for short-haul flights. The company believes that over the next 20 years, 23,240 single-aisle airplanes will be delivered. The rise of low-cost airlines in Asia will spur the need for Boeing's single-aisle aircraft that are popular for short-haul flights. This aircraft will also replace aging airplanes, such as MD-80s, 737 Classics and older A320s in the maturing market, creating additional demand.
One of the reasons that the company's shares remain unfazed from the events like safety concerns about the battery is the strong demand from its Asian clients.
A surge in the number of orders: Boeing was successful in winning some major orders coming from the emerging economies. Turkish Airlines ordered 70 737 planes from Boeing and has an additional plan to buy 20 B737-800 jets, 65 B737-8 MAX aircraft and 10 B737-9 MAX planes.
Boeing took an order of about 805 airplanes, worth $66 billion and delivered 477, worth $33 billion, during year 2012. In comparison, Airbus got an order for 1,419 (worth $70 billion) and delivered 534 of them (worth $32 billion). Therefore, in terms of the number of orders, Airbus is quite ahead but total value earned is greater for Boeing.
Additionally, Boeing booked 14 firm orders for 737 jets from Sberbank Leasing, a part of Sberbanl Russia (AKSJF) and two from an undisclosed buyer. Boeing said its net orders for the 737 stand at 153 so far this year. The number of orders the company gains becomes a major boost for investor confidence in the company's stock.
Fundamentals: Boeing has sound fundamentals that support the performance of its stock in the long term. With the price-to-earnings ratio at around 17, which is one of the highest amongst the industry players, this stock has maintained its price level to give its investors sufficient return. Factoring in the growth rate to its P/E, its PEG stands positive at 1. P/S of 0.8 shows the company has been able to maintain a healthy price level in comparison to its sales value.
Industry dynamics and Boeing's innovation
This industry is affected by various factors like fuel price, economic growth, environmental regulation and alternative modes of transportation. Boeing has been innovative enough to respond to the changes in these factors. With the rise in the fuel price, the company came up with more fuel-efficient airplanes such as the 787 and 737 MAX.
This industry is also affected by the government policy and the level of liberalization in the countries concerned.
There are two reasons for any government to deal with players like Boeing and Airbus:
- For the purpose of maintaining its military fleet
- To purchase airplanes for the state controlled airlines
By merging with McDonnell Douglas in 1997, Boeing became the second-largest aerospace and defense contractor in the world. Now the company is in a position to negotiate deals with governments to do package deals for commercial airlines and military equipments. This gives Boeing a clear advantage over its competitors that only deal in military parts.
In a long term, this industry has a very bright outlook because of the surging demand across all the economies. Demand, in turn, is surging because the world economy is growing and number of the passengers is increasing. The company expects 34,000 new airplanes valued at $4.5 trillion would be required till 2030. These new airplanes will also replace some of the less efficient ones, benefiting passengers and airlines.
With an increase in the number of the short-distance commuters, approximately 23,240 new single-aisle airplanes will be required. Besides, the twin-aisle airplanes segment will also increase by 7,590. Considering the cost efficiency and expertise of these airplanes, Boeing will enjoy an edge in terms of winning orders. Shareholders can expect the bottom-line of the company to rise in the long-term and can expect to gain returns on their investments.