The last year has been amazing for the Boeing (NYSE:BA) investors. Since the last time I wrote about Boeing last May, the company's share price has appreciated by 70%. Currently, the company trades at an all-time high share price. While there is no such thing as a "sure" or "safe" investment, Boeing has been as close to being sure as a stock could ever get and the investors are likely to continue getting rewarded in this company.
There are several reasons why Boeing has been such a great investment. First, the airline fleets in the developed world have been getting old and many planes needed to be replaced. Second, several countries decided to upgrade their air force equipment due to increased tensions in many parts of the world. Third, several countries including but not limited to China saw their economies grow rapidly, increasing air travel within those countries. Fourth, the newer planes are much more fuel-efficient than the older planes, which urged many airline companies to get their hands on these newer planes in order to save on their biggest and most volatile cost item, which is fuel. Fifth, Boeing has been enjoying a large backlog, which serves to guarantee the company revenues for many years to come. Sixth, the barrier of entry in the airplane manufacturing industry is very high and it is very difficult for competition to emerge unlike other markets such as the smartphone market where a new competition pops up from Asia every week. These five reasons, along with many others, have made and will continue to make Boeing a great investment for years to come.
In order to address some of the strong demand and the ever-growing backlog, Boeing decided to increase some of its production capacity. Recently, the company announced that it would invest $35 million to increase its capacity at Helena, Montana. The new investment will add 55,000 square feet to the existing manufacturing site and it will be responsible for ramping up production of the company's 787-10 model. When a company is aggressively investing into additional manufacturing capacity in order to address a growing demand, you know that it is a good investment.
Boeing continues to receive orders from both commercial and military customers. A couple weeks ago, it was announced that South Korea was ready to spend $7.64 billion on upgrading some of its fighter aircraft and Boeing is expected to win the bid since it is the only company whose offer was within the budget eligibility limits. Regardless of whether a global or local war occurs, Boeing will continue to sell aircraft to many nations across the world because countries don't want to be caught off guard, especially at a time tensions are high and global terrorism is on the rise. Putting politics aside, a possible U.S. intervention in Syria or Iran (or both) would be very beneficial to the business of Boeing.
In China, Boeing is expecting to see a lot of growth. In fact, the company will be delivering 120 planes in the country, which is up 50% from last year's 80 planes. The Chinese air traffic volume is expected to increase in double-digits for the rest of the decade (and possibly beyond) and Boeing is one of the biggest players in the country.
If the merger between US Airways (LCC) and American Airlines (AAMRQ.PK) gets approved, the combined airline will be replacing many of its older planes with newer planes in order to maximize its efficiency. Keep in mind that the combined airline will be the largest airline in the U.S. by volume and Boeing can expect a large number of orders from this new airline if the merger goes through. If the merger doesn't go through, the number of new plane orders will be a little smaller, but both US Airways and American Airlines will still need to order a lot of new planes to replace a significant portion of their fleet that is getting older.
The analysts are very optimistic for the company's future. For example, Sterne Agee increased its target price from $120 to $164 and the newly upgraded number represents 12 times the company's expected free cash flow in 2015. In fact, out of the 21 analysts covering the stock, 16 rate it as "strong buy," and 1 rates it as "buy," whereas 4 analysts see the company as "hold." There are no analysts that see the company as a "sell" despite its strong run up in the last year and half.
Even though Boeing's trailing P/E ratio of 21 is slightly over the market average of 19, the company's growth rate is much bigger than the average growth rate of the S&P 500 index. In the next few years, the companies in the S&P 500 index are expected to grow at a mid-single digit rate, and Boeing will continue to grow in double digits. In the last 12 months, Boeing earned $5.48 per share, and the company is expected to earn $6.50 per share this year, followed by $7.27 per share in 2014, $8.31 in 2015 and $9.01 in 2016. The company currently pays $2 per share in annual dividends and its current earnings can easily support this number. In fact, I would be really surprised if Boeing didn't increase its dividend payments to at least $3 per share (corresponding to a payout ratio of less than 50% for this year) in the next few years.
Boeing continues to be a great investment for both growth investors as well as those that are looking for a relatively stable blue-chip company. At this point, Boeing has both fundamentals and momentum going for it. In fact, I wish the company saw a correction or pullback so that I could load up on more shares, but I don't see that happening anytime soon unless the market itself sees a major pullback or a correction.