As the world globalizes, people move farther and more often than ever, and this increases the need for airplanes. For example, more people fly domestically in emerging markets than ever at the moment. Domestic flights are expected to grow 7.5% annually in China, which is much larger than 2.5% in US and Europe. Many airlines are buying new planes to replace or expand their existing fleets, and Boeing (NYSE:BA) will continue to benefit greatly from this trend. I believe that the biggest issue in front of Boeing will be having too much demand for its aircraft. Of course, this is a "problem" many companies would love to have.
Yesterday, Air Lease Corp (NYSE:AL) announced that it will order 60 Boeing 737 Max Jet Liners for $5.5 billion. Also yesterday, China Eastern Airlines ordered 20 Boeing 777s and the deal is worth $5.94 billion. These two deals alone are as large as 20% of Boeing's market cap. Boeing will start delivering 737 Max jet liners in 2016. The company already received orders for 1,000 of these planes and the number is expected to reach 1,300 by the end of 2012. The company expects to sell 5,000 airplanes in China alone in the next 20 years.
The new European Union regulations regarding carbon emissions might have different implications for Boeing. First, if may hurt sales of Boeing's older planes, and second, it might boost sales of the company's newer planes as these planes will be more fuel efficient. Currently China opposes and resists the new regulations and uncertainty will continue to dominate this issue for a while. No matter how things turn out regarding this issue, I don't see Boeing losing money as a result.
Boeing's new planes are far more fuel efficient than the ones in the past. Many airlines around the world are attempting to cut fuel costs in order to improve their margins, and such trend will probably fuel further sales growth for Boeing. In 2011, Boeing had strong results as the company achieved an earnings growth of 21%. The company earned $5.33 per share in 2011, compared to $4.46 per share in 2010. The company's 2011 revenue and EPS were both all-time high. Furthermore, Boeing has a very large backlog worth of $335 billion, which means the company is having trouble meeting the huge demand it's facing. In order to meet this demand better, the company recently opened a new assembly facility in South Carolina.
In addition, despite the budget cuts in the defense industry, Boeing's Defense, Space & Security segment performed exceptionally well in 2011. The segment is expected to continue to deliver in 2012 and beyond. More specifically, Boeing Defense, Space & Security segment has a backlog of $60 billion after delivering 115 military aircraft and four satellites around the world. The backlog guarantees revenues for the company for years to come at a time when countries are slicing their defense spending.
Moreover, Boeing's operating margins were near double digits both in commercial airplane and defense, space & security segments. It is typical to have low margins in expensive hardware such as airplanes and satellites, and 10% would be considered a very impressive operating margin in this business segment. The company currently has the capacity to produce 35 Boeing 737s per month and 7 Boeing 777s per month. By 2014, the company will be able to produce 42 Boeing 737s and 10 Boeing 777s per month. Because Boeing produces large and expensive items, it is very unlikely that a new competitor will emerge and threaten growth of this company anytime soon.
Boeing has a strong history of dividends that go back to 1930s. The company raises its dividend rate every 2 years or so. The current dividend yield is 2.28%, which is not bad for a company that continues to see solid growth. Because the company uses less than a quarter of its earnings on dividends, it is fine to assume that the dividends will keep coming for the foreseeable future. In fact, Boeing could double its dividend rate and still have healthy free cash flow. Since 2007, Boeing spent nearly $7 billion in stock repurchases and it is committed to continue to repurchase stocks in the future.
The company currently owns cash and equivalents of $10.05 billion. The company's total assets are worth $79.99 billion. This is far above the company's market value of $58 billion. Financially, the company is in good shape. Boeing is currently enjoying a P/E ratio of 13.43. Considering its cash holdings and its growth rate, we are looking at a forward P/E ratio below 10. The company has great valuation.
Investing in Boeing is a very good and safe way to gain exposure to fast growth in emerging markets, including China, without having to buy stocks from these countries.
Disclosure: I am long BA.