The Boeing Company (NYSE:BA), is perhaps the world's largest in the designing, manufacturing, developing, and selling of commercial jets, satellites, missile-defense systems, and military aircraft, among other products. They're also the second largest defense contractor in the U.S., and together with all other defense systems business, accounts for 56% of their total revenues. Meanwhile, their commercial airplanes segment earns about 41% of their total revenues.
The Defense & Aerospace Industry:
Next to China, our US military spending is the largest in the world, and accounts for almost 90% of revenues for all major defense firms across the country, from Boeing to General Electric and others. Unfortunately, with Bush still in presidency, our nation’s military budget this year rose to $470 billion (and for a sense of how much money that is, it's over 4% of our GDP). But wait, it doesn't stop there just yet. The Pentagon continues to request for an increase in the military budget by almost another $100 billion, so for 2007, there's no way of losing any momentum in Boeing's market.
On the international stage, just as good potential as domestically. Taiwan, and their threat from China, continues to order military-ware. Down-under from Australia, wanting to buy 24 of Boeing's F/A-18E/F Super Hornet fighter jets to replace their F-111's. Pakistan always looking over their shoulder from India, and buys F-16 fighter jets. Even with India, if their nuclear deal really does conclude, it will be a gateway to new weapon programs of all sort. The industry looks well, banking off the rising international security and military spending.
Outlook is for $640 billion in military spending for 2008. I think that's enough said.
At the same time, with the improving economy and the recovery in air-travel, the boom in travelers has triggered major order from around the world from both Boeing and Airbus. It hasn't been uncommon to watch on the 6 o'clock news every now and then that international airlines have placed a few more requests. The latest I've heard was new orders from UPS, another 27 Boeing-767 freighter aircraft. For 2006, just Boeing alone 398 has deliveries, and Airbus has 434 deliveries. In fact, if you look at the past year's performance, the aerospace industry earned an average return of 25%, followed by telecoms 22%, and finance 20%. And acquisitions, oh yes, acquisitions should sparkle up something this year, and if not, for sure in 2008. The proposed acquisition of Smith Group’s aerospace unit by General Electric will almost certainly spur consolidation in the airline-parts industry and an increase in M&A activity.
What's good for Boeing is that Airbus is delayed and backed-up in orders, giving Boeing the chance to run on ahead.
More on Boeing:
Earnings per share for Boeing has been simply increasing. It's gone up from $2.66 to $3.83 in the past year, which is close to 44%. Their earnings momentum is good enough that I can confidently say that their quarterly growth will continue for the most part of 2007. Even several analysts covering Boeing have revised their forecast upward, supporting what my belief. For their fourth quarter that ended December 2006. Revenues were up 26% to $17.5 billion and net income doubled to $989 million. Earnings estimates have been averaged at $4.75 for the year, an impressive increase from 2006's $2.86.
On their prices, I've noticed that Boeing's after large price movements there have been large mean reversions. A mean reversion effect supports that an above average price change is followed by an opposite change, converging back towards the average trend. For the year, Boeing’s stock price has gone up 25% which should mean that an above average performance over the next 6 months before another reversion.
My target price is over $100. Enjoy the gains.
About Boeing's F/S-18 E/F Super Hornets:
For those curious at mind, this fighter jet, the Super Hornet is fitted with a lightweight M61A1 20mm-cannon in thenose (400 rounds a second) and has 11 external stations (two on wingtips, threeunder each wing, two on intake sides and one under fuselage) for thewhole range of other weapons. It can fly over Mach 1.8, and accelerates less than 70 seconds from Mach 0.8 to 1.2. Costs about $43.6 million for one jet. Pretty cool stuff.
Disclosure: Author has no position in BA.
BA 1-yr chart