Boeing: Share Buyback Signals A Buy

When a company announces a share buyback, it usually implies that the company's leadership believes the shares are undervalued relative to their future earnings.

I won't deny that it is also another way for insiders to inflate the earnings of the company, create a better equillibrium between supply and demand for the company's shares, and therefore, inflate the share price. Regardless of the motive, share buybacks are good for investors because the typical end result of that is that stocks move up.

Boeing (BA), which has a history of buying back its own shares, announced Monday, that it would buy back $7 billion, or roughly 9% of its current number of outstanding shares at the current price. Seasoned Boeing investors might recall that the company bought $8 billion of its own stock since 2004 and this new announcement, while having no timeline, indicates the confidence management has in the company's ability to deliver strong earnings and revenue growth over a prolonged period. Since 2004, the company's shares have gained 150% despite the recent 12% pull back from summer highs.

Last week, Boeing announced a fantastic quarter, with earnings up over 60% and a total backlog of $295 billion. A lower guidance for 2008 due to the 6 month delay in their rollout of the much anticipated and awaited Dreamliner 787, was the only negative news from the conference call. In fact, since Boeing announced the delay and the subsequent increase in cost of production (Boeing is adding more manpower to the project), the stock has not participated in much of the market rally.

An important piece of information to consider is that Boeing's defense unit is doing very well and their reduced earnings in 2008 will be recouped and then some in 2009. Already over 700 Dreamliner's have been booked, resulting in a backlog of over $100 billion. Over the last few years, while the US airlines have not been purchasing new planes, their Asian and European counterparts have helped maintain demand for airplanes.

Some analysts believe that this will change over the next couple of years and US carriers like American Airlines, United, Continental and Delta among others, some of which have recently emerged from bankruptcy with cleaner balance sheets, will start looking to upgrade their respective fleets.

About a year ago, I had authored a bullish piece on Boeing Back then, the stock was at $81, and while it has not performed as expected, it is still up over 18% despite the recent correction. $92 has since become a strong level of support for the stock and I believe that at 16 times earnings, the stock is a buy at current levels.

On a side note, one of the reasons for delay in the Dreamliner project is a supply shortage of bolts. Maybe I will write about Precision Cast Parts (PCP) or Goodrich (GR) next.

Comments

[rudy4808]

There is a very real possibility of $125.00 per share in 6 months !