Boeing Stock Awaiting Take-Off

| About: The Boeing (BA)

Investopedia Advisor submits: This past Wednesday, Boeing Co. (NYSE:BA) reported a second quarter loss of $160 million, or 21 cents per share. Despite being roughly in line with Wall Street expectations, the stock dropped about 3%. Although this was a big loss, I would argue that the sell-off was unwarranted. Further, I'd also wager that both the short- and the long-term outlook for the world’s largest aerospace company is actually quite good.

Here is my logic:

First off, investors need to dissect the earning report. The loss included a $1.15 per share charge related to a legal settlement with the U.S. government and delayed military aircraft projects. Without the one-time charges, the company would have actually posted a healthy profit.

But even beyond that, a closer look at the company’s business, more specifically, its ability to land orders, reveals that it is poised for solid growth. At quarter end, the company said that its backlog of orders totaled roughly $220 billion, of which about $141 billion is related to commercial aircraft. As a result of these growing orders, management also said that it intends to deliver 395 aircraft to its customers in 2006, and then between 440 and 445 aircraft in 2007. Again, that’s some serious growth.

Also, for those keeping track, that backlog number is about $7 billion ahead of last quarter. In other words, despite all of the talk about rising fuel prices, and domestic economic worries, the company is still getting some serious sequential quarter-to-quarter orders that should keep earnings in an accelerating pattern for the next few years.

As evidence of the positive trends, in conjunction with its earnings report, management said it expects to earn between $4.25 and $4.45 per share in 2007. That implies a roughly 15% to 20% growth rate over what the company would have earned, excluding the above-mentioned one-time charges.

Now, naysayers will say that the company’s military aircraft business is likely to be stagnant in the face of lower military spending. To that, I would generally agree. However, I would point out that other areas of the business are poised to grow and to pick up much of the slack.

For example, management recently said that it expects the global fleet of cargo planes to double over the next twenty years to 3,563 planes. The company pegs the value of these new plane additions to be worth about $169 billion. If nothing else, these figures should give investors some idea of the kind of business that is out there for the company to capture. This also says nothing of the increased demand we are likely to see from countries like China, as their economy continues to expand.

Then there is the Boeing 787 (pictured). The company said it already has 364 firm orders from 25 customers worldwide. The aircraft, which is expected to be flying by 2008, is Boeing’s answer to the Airbus A350. And although aerospace experts can argue all day long over which plane has more capacity, or which is aerodynamically a better design, the fact is that once this aircraft enters service, it will become an industry standard, and will help to solidify Boeing’s standing in commercial aircraft production for years to come. To be clear, it is difficult to quantify this product’s potential in terms of dollars and cents. Suffice to say that is just one more feather in the company’s cap, and one more potential revenue driver in Boeing’s already extensive arsenal of products.

Another thing I like is the company’s ability to generate cash each quarter, and what it does with that cash. In the quarter, Boeing generated $2.4 billion in operating cash flow. It used some of this cash to repurchase 6.3 million shares of its stock during the quarter at a cost of $525 million (equivalent to $83.33 a share). It also used the money to pay down about $500 million in debt. The fact that management is using its cash to buy stock, rather then return the capital to shareholders in the form of a dividend, or on an acquisition, I think, speaks volumes about the company’s future. And the fact that management continues to pay down debt, in my mind, shows that is being a good steward of shareholder funds as well.

Historically, I think that management has done a great job of under-promising and over-delivering when it comes to earnings. In other words, I think that Boeing’s actual earnings for 2007, which is where everyone should be focused right now, will actually come in at the upper end of its guidance. If that happens, I can’t help but think that the shares will trade higher from here. Realistically, based upon its fundamentals, and future earnings potential, I think the shares are worth $95 over the next 12 to 18 months, which implies an upside of about 17% from current levels.

BA 1-year chart:

By Glenn Curtis, Contributor - Investopedia Advisor
At the time of release Glenn Curtis did not own any shares in any of the companies mentioned in this article.