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Summary

  • Boeing recently announced an agreement with the US Navy for 47 new fighter jets.
  • Late in April 2014 Iran also showed willingness to buy 400 new passenger airplanes to support its retiring fleets, if sanctions are eased.
  • With the world economy recovering, IATA expects a good outlook for the aviation industry and predicts passenger traffic will rise by 5.8% YoY in 2014.

Boeing (NYSE:BA) is the world's largest aircraft manufacturer and second-largest aerospace and defense contractor. Boeing earns one third of its revenue from its Defense, Space and Security division "BDS" and the rest from its commercial airplanes. I would like to discuss the investment case for Boeing in light of recent developments as well as earlier pending orders of the company and its valuation.

Stock Price

The Boeing Co. stock generated a return of over 40% for shareholders compared to a return of 15% for the S&P 500 Index.

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Source: Google Finance

The US Navy Deal

On May 05 2014 Boeing announced it was striking a multibillion dollar deal with the US Navy for 47 fighter jets. Mike Gibbons, vice president of the 11 F/A-18 Super Hornets and EA-18G Growlers program, said that the agreement has been reached and the contract will be signed during the next couple of months. The package will include 12 Growler for Australia, 11 Super Hornets, 21 additional Growlers and two more Growler jets incorporated in a legal agreement with the United States.

In March 2013, Australia requested 12 Growlers as well as another 12 Super Hornets for coalition missions and homeland defense as part of a foreign military sales agreement.

The Growler, a modification to the F/A-18F Super Hornet, is the only military aircraft in production that provides tactical jamming and electronic protection for the US and allied forces. The US Navy values the Growler as the Program Manager for F/A-18 and EA-18G, Frank Morley, regards the Growler as a high-demand asset that is critical in disrupting their enemies' operations as well as enhancing their own. Management at Boeing believes that the Navy needs 50 to 100 more aircrafts to meet future requirements.

Prospects from Iran

The United States banned its aviation companies from selling aircraft and repair parts to Iranian airlines in 1995. Iran currently has a fleet of about 250 commercial airplanes out of which at least 100 are grounded due to unavailability of spare parts. In April 2014, the US granted a license to Boeing to sell spare parts to Iran for its aging passenger airplane fleet as part of an interim agreement regarding Iran's nuclear program.

Iran expressed the need to buy as many as 400 new commercial planes to meet the growing air-travel requirements of its 76 million citizens in the case the sanctions are lifted. Iran's top aviation official, Jahangirian said they would be ready to buy 40 new planes each year for the next ten years. Leading US manufacturers Boeing and Airbus are expected to be major beneficiaries of any further developments on sanctions-easing for Iran.

The Huge Boeing Backlog

Even if the new developments on current and potential orders are ignored, Boeing has a massive backlog that totaled $440 billion at the end of Mar 2014. This means Boeing can continue to maintain its current revenues for the next five years even without any new orders. Prospects look great for Boeing's future passenger plane orders. The International Air Transport Association (IATA) expects good outlook for air traffic going ahead and predicts a year-on-year increase of 5.8% for 2014 compared to 5.2% in 2013.

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It should be noted that Boeing commands a magnificent 40 percent market share of global commercial airplanes. The launch of fuel-efficient models like the 777X will attract further orders for Boeing from airlines operating in a thin-margin industry and for whom fuel comprises more than 30% of their total cost of sales.

The Investment Case

Boeing seems to have abundant orders to fulfill thus guaranteeing a strong top line for the company in the coming years. The company is already taking measures to build up its production capacity to keep up with its backlog. The world's largest commercial plane maker expects to increase its production to deliver 715 to 725 planes in 2014 compared to 648 in 2013. Rival, Airbus, on the other hand hopes to produce 626 jets in 2014 the same it produced in 2013.

As far as earnings go, Boeing expects to post an EPS of $7.15 to $7.35 in 2014 compared to $7.07 in 2013 reflecting a 2.5% growth YoY at mean point. In Dec 2013 the company raised dividends by 50% and announced a share repurchase plan of $10 billion; shares worth $2.5 billion were repurchased in Q1 2014. The quarterly dividend is now 73 cents per share up from 48.5 reflecting a 2.2% dividend yield. The stock is trading at a twelve month trailing P/E ratio of 22.5 compared to 26.1 for Airbus Group NV (OTCPK:EADSY).

Conclusion

Boeing's stock is a rare mix of safety, growth and dividends. The company has excessive production orders and is looking to increase its capacity to meet them. Global economic recovery is playing well in increasing air travel and boosting revenues for airlines and they are looking to invest in expanding fleets. So, with such great prospects I offer a buy rating for Boeing.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Source: Boeing: Great Prospects Ahead