When I look for long term investments I like to evaluate the trend of the industry and company. Once I have identified a nice trend to invest in, I look for stocks that may benefit from that trend. Boeing (BA) has several factors that should benefit the company in the long term.
Boeing projects strong demand for new aircraft going into 2030. Projections estimate that 33,500 new planes will be delivered worldwide over the next 20 years. Total sales volume for these planes should amount to more than $4 trillion. Strong sales will mainly be driven by the airlines need to replace older less fuel efficient aircraft. I also expect passenger traffic to increase once an economic recovery gains steam.
The recent bankruptcy of American Airlines (AMR) has raised some concerns from investors. Some investors are worried that the deal with Boeing may be reduced or be cancelled. American Airlines ordered 13 777s, 143 737s and 32 787s from Boeing before filing bankruptcy.
I'm not worried about the American Airlines bankruptcy for several reasons. In a way, I view the bankruptcy as a positive for Boeing. Chapter 11 bankruptcy will allow the new American Airlines to emerge much stronger. American Airlines has been bargaining hard with unions in an effort to lower labor expenses but failed to do so. American Airlines then felt that it must file bankruptcy in order for it to adjust its labor expenses as well as make adjustments to its existing leases. This bankruptcy will now allow American Airlines to compete much better.
New aircraft will play a key part in the turnaround of American Airlines. The company is looking to minimize expenses and the best way to do that is to drop older less efficient planes. Although some terms in the leases may be changed I don't expect Boeing to take a big hit. I see American Airlines with the most to lose if this deal doesn't get done.
Here are other factors I like about the Boeing story:
- Boeing's commercial airplanes unit has a backlog that has climbed to $273 billion, including $20 billion in new orders during the most recent quarter. I also like how the orders are from various regions around the world. Only about 1/3 of the orders are from the U.S. and Europe.
- Boeing is close to finalizing its 787 program and will start putting its main focus on production. The company recently delivered its second 787 to ANA.
- I like how Boeing is looking to increase production to meet huge demand for its aircraft. The company will increase production on the 787 from 2 planes per month to 2.5. The company plans to increase this number to 10 per month by the end of 2013. Boeing is currently increasing production on its 737 and 777 models as well. The company plans to increase production by 20 to 30% for both models. Full production increases should be in effect by 2014.
- Boeing has a very predictable business due in part to the company's backlog of orders. Even though there is still a possibility some of these orders could drop off, it gives me an idea about the demand for the company's products as well as a road map for the future.
I'm bullish on Boeing and view pullbacks as opportunities to buy. I expect a majority of Boeing's orders to stick due to necessity. Airlines are fighting to have a competitive edge. The best way to achieve that in this environment is by having a fuel efficient fleet. I also like that Boeing pays you while you wait, the company currently has a 2.57% dividend.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BA over the next 72 hours.