Boeing (NYSE:BA) has been trading mostly within a very narrow range during the last 6 months, between $125 and $135. In addition, it is well below its 52-week high of $150 while there have been some negative headlines for the company, such as its reduced guidance for the total sales of this year. In this article, I will analyze why investors should ignore the short-term headwinds and focus on the big picture.
First of all, Boeing has ample room for future growth in the long run. To be sure, the company forecasts a demand for 39,620 new airplanes over the next 20 years, thanks to a 4.8% annual growth in traffic over that period. If one thinks that the company is too optimistic, one just has to check the relevant forecast of its main competitor, Airbus (OTCPK:EADSY), which projects about 33,070 new airplanes on a 4.5% annual traffic growth over the next 20 years. These growth numbers strongly rely on emerging economies and particularly India, which experienced the fastest growth pace in the world last year, with air traffic up 18.8%. India is expected to purchase about 1850 new airplanes over the next 20 years, which will be worth $265 B. All these numbers bode really well for the long-term growth prospects of Boeing.
Investors should also realize that the company is highly leveraged to the global economic growth. More specifically, while the global economy experienced lackluster growth last year, the global passenger traffic grew 6%. This is a critical point that often goes unnoticed, as some investors erroneously think that Boeing needs exciting global GDP growth to keep growing its earnings.
The main reason for the leverage is the fact that the airlines need to replace their fleet quite often in order to remain competitive and adapt to their continuously changing business environment. Therefore, they do not order new airplanes only to meet increasing traffic demand. They also have to replace their fleet on a regular basis in order to reduce their operating expenses, as new airplanes have lower fuel consumption. Moreover, they often have to replace old airplanes in order to comply with new, stricter safety rules. While these requirements are not beneficial to airlines, which have to spend huge amounts on capital expenses and thus carry excessive debt loads, they are very beneficial to Boeing.
On the other hand, investors should always remember that leverage is a two-edged sword. Consequently, while Boeing keeps growing at impressive rates during good or even moderate times, its earnings plunge during recessions. To be sure, its earnings per share plunged 65% during the Great Recession in 2009. This cyclicality is the main reason for the somewhat cheap valuation of the stock, which is currently trading at a forward P/E=13.6. Hence only investors with a long-term perspective should consider purchasing this stock. If they do not have a strong enough stomach to tolerate a temporary 50% plunge of the stock, then they should definitely not attempt to purchase it.
There are also some signs that the sales of Boeing may be peaking in the short term. First of all, the company decided not to raise the production rate of its 787 model due to lackluster demand. Moreover, while the company used to raise its prices by about 3% per year, it did not raise its prices for the first time in 7 years due to its concerns over decreasing demand. Even worse, it recently reduced its guidance for this year's sales from 740-745 to 535 jetliners. This pessimistic forecast raised a red flag for many investors, who were deeply surprised by the drastic reduction.
However, investors should realize that this reduced guidance is almost negligible given the exceptional backlog of the company. More specifically, the backlog of the company currently stands at $472 B, with approximately 5700 airplane orders. This is equivalent to the sales of 7 years! In other words, the company has already secured its revenue for the next 7 years and hence a decrease of 200 airplanes in one year is almost negligible. To be sure, even if the reduced guidance eventually materializes and the company experiences this reduced level of sales every year from now on, it will take about 28 years for the backlog to be exhausted. All in all, investors should not miss the forest for the trees.
Finally, it is remarkable that Boeing has not cut its dividend for at least 30 years. While this record is exceptional for any stock, it is even more astounding for a highly cyclical company like Boeing. Given its high cyclicality, its dividend record only proves the perfect execution of the management and the great potential for consistent, excellent long-term returns.
As a side note, I am somewhat concerned over the share repurchases of the company. More specifically, the company has aggressively repurchased its shares in the last two years and reduced the share count by 9% in the last quarter over last year. Even worse, these aggressive buybacks almost eliminated the book value of the stock, as the company spent more than its earnings on the buybacks. While this is not necessarily negative on the surface, the recent experience has shown that cyclical companies tend to resort to extreme buybacks near the peak of their business. Although this is certainly not the right way to execute share repurchases, this is exactly what we witnessed at the top of the oil cycle two years ago, with companies such as Exxon Mobil (NYSE:XOM), Chevron CVX) and National Oilwell Varco (NYSE:NOV). Investors should not evaluate Boeing only based on this last note but they should just keep it in their mind as a note.
To sum up, the lackluster outlook for global GDP growth and the reduced guidance of Boeing have led the market to be cautious on the stock. In the short term, the sales of the company may have topped out. However, as long as investors have a long-term horizon and can stomach potential short-term slumps of the stock, they can enjoy excellent returns from the stock thanks to its exciting growth prospects.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.