Boeing: A Solid Second Half Play

Jun.30.14 | About: The Boeing (BA)

Summary

Industrials like Boeing have underperformed the S&P 500 at the halfway point in the market for 2014.

This should change in the second half of the year, as the global economy accelerates.

Boeing is a solid value here. Earnings and production are ramping up, the stock pays a solid dividend and the shares are a good proxy on emerging market growth.

Today is the last trading day for the first half of 2014. It has been a solid, but not spectacular start of the year for equity investors. The S&P 500 is up a little more than six percent to begin the year, including dividends. The Russell 2000, DJIA and NASDAQ have lagged the S&P 500 to this point in 2014.

As we begin the second half of 2014, I am looking at some sectors that have lagged the market so far in the year, but probably will have better stories and returns in the second half. As economic growth accelerates in the second half of the year - the current consensus - industrials should benefit.

Industrials have underperformed the S&P 500 slightly over the past six months. Boeing (NYSE:BA) has been a significant underperformer over that same time frame (See Chart).

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I think Boeing will be a solid second story and a worthy investment at these levels. The stock has been under some pressure, as a congressional battle for the reauthorization of the Export-Import Bank has been in the headlines recently. These concerns are overblown. First, it is next to impossible to kill a government agency or program once it is established - despite recent charges of corruption at the bank. Second, Boeing should have no problem obtaining financing at attractive rates regardless of the outcome of this latest political football.

The company continues to gain impressive order backlog for its new Dreamliners and also has fixed most of the snags associated with the initial production rollout - which is normal for such a huge and complex product. It is also in the bidding for a $16B order for new planes from Dubai's Emirates, which it just cancelled with Airbus, as just one new high profile order possibility.

More importantly, Boeing is at more than a reasonable value here. The stock is priced at under 17 times forward earnings, roughly in line with the overall market. Earnings are tracking to an eight or 10% year-over-year gain in 2014. Earnings should accelerate slightly in FY2015, as production of the 787 (Dreamliner) continues to ramp up.

Boeing is in the early stages of product rollout which bodes well for continuing earnings and improving margins for years to come. The shares also pay a solid 2.2% dividend yield and I would expect dividend growth to be in line with earnings growth in the coming years. Finally, Boeing is a great proxy on continued growth in emerging markets like China & India where demand for air travel is growing at multiple rates of that in the developed world. The shares are approximately 15% below the $157.50 a share median price target the 22 analysts that cover the company have on the stock. The stock is also down some five percent from very recent highs. ACCUMULATE

Disclosure: The author is long BA. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.