Boeing: Upside Towards $150

| About: The Boeing (BA)

Summary

At Boeing's shareholder meeting, management reaffirmed its guidance, which should alleviate concerns about the pace of production.

Its backlog of $441 billion provides Boeing with substantial revenue visibility and a long growth runway.

While commercial aviation is the driver of growth, defense should stop being a drag by the end of 2015 thanks to cost cutting and improving fundamentals.

Boeing should trade towards 20x earnings or upwards of $150.

On Wednesday, Boeing (NYSE:BA) held its annual shareholder meeting, and there was important information for both current and prospective shareholders. Since dealing with the 787 Dreamliner's battery problem, it has been a pretty strong year for Boeing with its backlog growing and shares rallying. Over the past twelve months, shares have jumped 32%, though they have been struggling to move out of the $125-$133 range over the past four months. While it is difficult to make short-term market calls, it is clear that Boeing has significant long-term upside.

At the meeting, management reaffirmed its 2014 guidance for $7.15-$7.35 in earnings on $87.5-$90.5 billion in sales (details available here). Management does have a history of being very conservative to ensure it can still meet guidance even if there is a hiccup. This guidance is an example of management's strategy as the street is looking for a more robust $7.55-$7.65 on $90 billion in sales. Still, there had been some concerns over the past month that Boeing was not manufacturing as many 787's as planned. The fact management stood behind its guidance suggests this concern is a bit overblown.

It is important to note that Boeing is benefiting from a long-term refresh cycle in commercial aerospace. Importantly, the carriers, particularly in the United States, are more profitable than ever thanks to consolidation and higher operating efficiency. This better operating performances gives the carriers the financial capacity to invest in new planes. With the 787 and new 777x, Boeing's planes are far more fuel efficient than existing planes, increasing demand even more. Boeing's profits are being constrained by limited supply rather than limited demand. This is a far better problem to have as a company cannot control demand but can increase its supply by adding workers, shifts, and plants, which Boeing has been doing.

In fact, Boeing's backlog is as big as ever with management saying at the meeting that the backlog is $441 billion. $374 billion of the backlog comes from the commercial division with $67 billion comings from its defense operations. This backlog means that Boeing can run its factories at capacity for about five years without receiving a net new order. With this backlog, Boeing has strong revenue visibility and is insulated from monthly fluctuations in economic activity. Of course, Boeing is still receiving net new orders on top of this backlog. In the last quarter for instance, it received $19 billion in net new orders (financial and operating data available here). Boeing's backlog is large and growing, providing a long runway of growth.

With new orders from the commercial side coming in strong, Boeing will likely be eating through its backlog for upwards of a decade. This backlog represents future revenue and makes Boeing's growth potential quite clear. With increasing capacity and massive pent-up demand, Boeing is poised to deliver double-digit earnings growth for at least 3-5 years.

Now, as the backlog data shows, the commercial division is the primary driver of growth. However, the defense division is still an important division. With increasing fiscal austerity, government defense budgets are constrained, which is why this unit has been reporting a year over year decline in revenue. I do expect a stabilization in the next 15-21 months. The recent crisis in the Ukraine shows that there are still major geopolitical risks in the world and will likely provide some support for defense spending. Government deficits are also shrinking around the world, which will give governments the ability to invest in their military.

After two wars in the Middle East, the U.S. is also focusing more military resources towards Asia to counter China's rising power. This shift will require heavier investment in naval and air power, which should leave Boeing better positioned than some other defense contractors. Finally, Boeing has been aggressively cutting costs at its defense unit and plans to cut another $2.1 billion over five years, which will make this division more profitable even in a lower revenue environment. While commercial aviation will be the main area of growth thanks to the massive backlog and fuel efficient offerings, defense will stop being a drag by the end of 2015.

Given these solid long term fundamentals that management reaffirmed at the shareholders meeting, Boeing clearly is a great growth story. Importantly for investors, it is not a particularly expensive stock. Shares are trading 17.5x earnings, which isn't bad for a company with double-digits earnings growth and strong revenue visibility. The company will also generate $7 billion in free cash flow, giving it a free cash flow yield of 7.35%, which is very attractive for a company with 10% earnings growth. Boeing is also returning this cash back to shareholders with a 2.2% dividend and aggressive share buyback plan. With a five year earnings growth rate of at least 8-10%, I would be a buyer of Boeing here and think fair value is 20x earnings or upwards of $150.

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.