The market obsesses about quarterly plane deliveries and orders at Boeing (NYSE:BA) while missing the big picture for the airplane manufacturer. As part of a duopoly with Airbus (OTCPK:EADSY), Boeing is more of a cash flow and overall plane demand story as compared to monthly order fluctuations.
Competitive threats are always worthy of research. Due to typically misplaced fears related to competition, the stock has provided numerous opportunities to purchase the stock in the $115 range going all the back to late 2013. The question now is whether another opportunity will exist as the stock trades close to $130.
One minute the market is focused on the amount of deliveries of the wide-body planes no longer in demand. The next minute, the market obsesses about a large customer claiming used planes are very cheap.
In the end though, a country like Iran wants 100s of new planes from both Boeing and Airbus (duopoly effect) and Delta Air Lines (NYSE:DAL) is talking about placing an order for possibly 737s to replace the aging MD-88 fleet. According to their website, Delta has 116 MD-88 planes that are so old most millenials probably don't even know that MD stands for a prominent airplane manufacturer of the past. What isn't even mentioned is that the airline uses another 65 MD-90 aircraft with an average age of 18.6 years.
According to reports, Iran plans to buy equal amounts of Airbus and Boeing planes to upgrade a fleet in serious need of new aircraft and parts for old planes after years of restrictions due to the embargo. The country reportedly placed an order for over 100 Airbus planes already. A similar deal with for Boeing is apparently on the way once the company obtains the necessary license approval from the U.S. government.
In the case of Delta, the airline appears focused on Bombardier (OTCQX:BDRBF) planes to replace the aging MD-88s for shorter domestic flights. The company though could take a similar route and go with the 737s like United Airlines (NYSE:UAL).
Either way, both situations speak to how the market ebbs and flows. Iran wants to place a massive order now that the market is open to them and the duopoly naturally forces the country to place orders for both manufacturers. While, Delta Air Lines spends every opportunity smashing the market for new planes to only turn around and need to place a large order due to the aging fleet.
Free Cash Flow Machine
All while Boeing has amassed a massive backlog of 5,740 orders making the amount of new orders virtually meaningless. Naturally, the company doesn't want to see the order book shrink too much, but the delivery schedules for new orders especially of the popular narrow-body 737 is already into 2020 and beyond.
The better focus is on the enormous cash flow the plane manufacturer will generate with all these orders while having the ability to slash $1 billion in annual costs. Boeing is already very free cash flow positive and Sterne Agee CRT sees that FCF number rising substantially over the next three years as follows:
- 2015A - $6.9B
- 2016E - $7.4B
- 2017E - $8.5B
- 2018E - $9.7B
The amazing part is that analyst Peter Arment maintains a $196 price target on the stock. Reading the details one might think he would raise the target if not for the stock trading $68 below the target price already. The situation provides for the rare occurrence where an analyst forecasts a 50% increase in the stock price of a mega-cap stock.
With these levels of free cash flow generation and a stock only worth $85 billion, the returns to shareholders are vast. Not only does the stock offer a 3.4% dividend yield, but the company has a net stock buyback yield of 8.0%. The combination is a very high net payout yield.
The big benefit to shareholders is that the per share numbers will constantly get a boost when the company generates that much cash in comparison to the stock value. So not only will the FCF grow by roughly $1 billion per year, but the FCF per share will surge as the outstanding shares will continuously decline.
As an example, the FCF per share was roughly $10.42 last year with 662.5 million shares outstanding. The number will surge to $18.80 per share in 2018 if the share count is reduced to 515.9 million shares by a constant repurchase of 8% of the outstanding shares each year. Note the calculation utilizes the outstanding shares at the end of the year and not the average share count for the year.
The number of share repurchases is highly dependent on the level of the stock price over the next three years and the ability to meet the FCF targets set by Sterne Agee. Even assuming half of the share reduction rate at only 4% versus 8%, the share count still falls to 586.1 million in 2018. The FCF per share still reaches $16.55 that year.
Sitting below $130, Boeing is still a cheap stock with the ability of the company to grow FCF and return the cash to shareholders. The resulting impact is a huge surge in FCF per share over the next few years. Investors should buy the stock now, but always save some capital for the potential that the stock again drops to $115.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BA over the next 72 hours.
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.
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