Can Boeing Turn Challenges Into Opportunities?

Mar. 1.14 | About: The Boeing (BA)

Lately, it would not be fair to say that the market is madly in love with Boeing (NYSE:BA). Last year, things were going a lot better for the investors of the company compared to this year. At the moment, many investors are worried about Boeing's defense business and they are not convinced that the company's commercial plane business will be able to pick up the slack of the defense business. Boeing's commercial plane business is production-constrained and will be so for a long time, and this makes many investors wonder if this business will be able to grow fast enough to compensate for the weakness of the defense business.

Recently, Boeing announced that it would try its chance in the smartphone industry as it looks to replace BlackBerry (NASDAQ:BBRY) as the preferred secure phone of government workers. This is a surprising development and we don't know whether Boeing will be seeking to buy BlackBerry in the near future while BlackBerry's share price is pretty close to its book value. This new Boeing phone will be able to encrypt calls and delete all the data and become inoperable if it noticed fishy activity, such as opening the case. Lately, leaking phone calls made between government officials is becoming a new trend and security is becoming a big issue. As a government contractor, Boeing can throw in these phones to any existing contract or any contract in negotiation in order to boost its position and help its struggling defense business. The phones might not be very profitable unless they reach a large volume; however, this can help the company get more contracts. This may sound far-fetched; however, in the future, I can see smartphones playing a role in wars where many non-human units (such as drones) can be controlled with these phones. If Boeing can provide a link between its other products and these phones, it can sell a lot of copies to the military.

Interestingly enough, Boeing is laying-off up to 600 employees in its production plant in San Antonio, Texas. The company gave "drop-off in commercial airline work" as a reason for the lay-off, which makes things even more interesting. Last time I checked, Boeing had a backlog of nearly $450 billion and the company was complaining about how it can't build planes fast enough. I am curious why Boeing is reducing its headcount at a time it can't keep up with the demand. Perhaps, the company is planning on starting another plant at another location or shift production to other locations where costs are lower. In fact, Boeing will offer to relocate some of the laid-off employees to other locations where there is higher demand for employees.

Here is a note from Boeing regarding the production site in San Antonio:

"Over the past several years, our site has changed dramatically by taking aggressive actions to reduce costs, increase efficiency and diversify during difficult economic times by adding commercial aircraft to our portfolio. Commercial airlines placing future work here is an indicator that our strategy of attracting that market does have a promising future. Plus, we still have substantial commitments with C-17 GISP and the forthcoming support for the U.S. Executive Fleet."

Furthermore, Boeing signed a 7.5-year contract with its 2,300 employees in St. Louis Missouri. The employees were represented by a union called International Association of Machinists and Aerospace Workers. In St. Louis, Boeing generally builds military aircraft such as the F/A-18E/F, the F-15, the EA-18G electronic attack aircraft, and other weaponry and support systems. This long-term contract will help the company stabilize a significant portion of the costs in its defense business in the long term and provide some certainty moving forward.

Meanwhile, Boeing still wasn't able to sell some of the earlier versions of its Boeing 787 Dreamliner. There are currently 11 of these planes with a total price tag of $1.1 billion and Boeing has been trying to get rid of these planes for a long time. One would think that Boeing would be able to sell these planes very easily, given the strong demand for commercial planes at the moment. Many airlines around the world have to wait for years for their deliveries to arrive due to the massive backlog of Boeing, but the company sees nearly no demand for the 11 older models it wants to sell. Earlier, two airliners were scheduled to pick up these 11 planes, but they canceled their order, which left Boeing looking for new buyers. To some, these planes represent the earlier incompetence and mess-ups of Boeing, and while some investors are convinced that those days are far behind, many are still cautious. These planes are heavier and they enjoy shorter ranges than the latest versions of the same planes. Prior to Boeing getting the U.S certification for these planes, many of them were built and most of these models required fixes or upgrades before they were able to meet federal guidelines. This is why many airline companies are apprehensive about buying these 11 planes. At the end of the day, Boeing will probably be able to sell these planes to some low-cost airliner operating in shorter routes in Asia or Latin America.

Furthermore, while laying-off employees in Texas for lack of work, the company is offering bonuses to employees in its plant in North Charleston, South Carolina in order to boost production. In order to meet production goals, many in-production planes have been leaving this plant and moving to the final assembly plant in Everett, Washington before they were fully completed. As a result, many of these planes required extra work in Everett, creating a bottleneck in the giant plant. If the Charleston plant can figure out a way to fix this problem in a few months, most employees in the plant will be getting bonuses as large as 8% of their annual salary. The plant recently hired 1,100 skilled contractors in order to tackle this problem and some workflow fixes will also have to be made to fix the problem completely. As of last week, the plant is behind the schedule by about 10 days or 8,000 job tasks (pushing the Everett plant back by 2-3 days), and if the bottlenecks in this location are handled, this will increase the overall productivity and revenues of the company greatly.

As you can see, Boeing has several issues to work on, and these issues present themselves as opportunities for future growth. Recently, analysts reduced their earnings estimates slightly for Boeing. For the current quarter, they expect the company to earn $1.58 per share and for the next quarter, they expect the company to earn $1.84 per share, down from earlier estimates of $1.73 and $1.88, respectively. For the full year, the analysts expect Boeing to earn $7.38 this year and $8.24 next year; whereas, last month, they were looking for $7.52 for this year and $8.39 for the next year. Keep in mind that Boeing has been able to beat estimates for more than 12 quarters in a row and I am sure this trend will continue as we move forward. Even if Boeing barely meets the estimates, it still gets a forward P/E of 15, which is pretty low for a company that has a massive backlog and almost guaranteed growth opportunity unless it messes up big time. This is why I will continue to be invested in Boeing.

Disclosure: I am long BA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.