Boeing To Soar On Earnings Visibility

| About: The Boeing (BA)

On July 3, Boeing Co. (NYSE:BA), the world's largest aerospace company and the leading manufacturer of commercial airplanes, announced that the forecasted demand for the next two decades, i.e. till 2030, is 34,000 commercial airplanes, 500 more than its forecast made six months ago. The firm attributes this rise to the increase in demand of aircrafts in emerging markets like China and India. However, sales in the Middle East have dropped by 6% owing to political turmoil in the region. The sale of single-aisle jets is expected to be 23,240 units. However, this is less than the last forecast of 23,370 jets. The expected revenue from these jets is expected to be $2.03 trillion.

Also, the twin-aisle jets forecast has increased by 620 units to a total of 7,950 jets. This means that the "surprise" revenue from the twin-aisle jets will be around $310 billion, totaling up to $2.08 trillion from twin-aisle jets. The forecasted demand for cargo planes has been reduced from 3,200 to 3,500 by 2030. This is nearly double the current freight fleet of 1,740. The negative "surprise" has come because the global economy is going through a recession, fuel prices are high and lower cost alternatives like shipping exist. The following table depicts the current potential in the market:

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Region

CMO 2011

CMO 2012

Change

Asia Pacific

11450

12030

5%

North America

7530

7290

-3%

Europe

7550

7760

3%

Middle East

2520

2370

-6%

Latin America

2570

2510

-2%

C.I.S.

1080

1140

6%

Africa

800

900

13%

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The following are the four reasons that are listed in the Current Market Outlook of Boeing, which have spurred this demand:

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There is one last figure that should be mentioned before we can estimate the effect of this announcement on Boeing's price. There is strong demand to replace the lesser fuel-efficient aircrafts. The replacement accounts for 41% of the demand of 34,000.

Boeing Co

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Boeing claims that it owns 50% of the current world's fleet of aircrafts. Boeing has maintained this share since 1977, which suggests that it will continue to maintain it in the near future.

Given the fact that 34,000 jets are in demand for the next 20 years, Boeing will be supplying 17,000 of the total amount. However, we are more concerned with the surprise increase of $500 billion in the sales revenue that is going to be generated by this industry in the next 20 years. Due to an efficient market, the expected revenue of $4 trillion, to be generated in the next 20 years, has already been priced in the companies' stocks operating in this industry. However, it is this $500 billion that will boost these stocks' prices upwards.

Analyst estimates tell us the following story:

Valuations

$

Revenue-2011

68.7b

Revenue-2012*

79.54b

Revenue-2013*

86.115b

P/E (TTM)

12.86

Forward P/E

13.12

PEG ratio (5 yrs)

1.5

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Source

Price Target Summary

$

Mean Target:

85.85

Median Target:

87

High Target:

96

Low Target:

68

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Price can go up by almost 16% (average target), after this news. However, in a bullish scenario we expect the stock to trade up to $93 (15x 2013 bullish EPS). The valuations can improve even further as earnings visibility is on the higher side now. The stock also offers a dividend yield of 2.4%.

It is very important to take into account whether Boeing can meet the increased demand by increasing its production. The firm is confident that its suppliers will adjust to the increasing demand:

"We are working very closely with our suppliers to make sure they are ready for a 30% production increase by 2014," said Mr. Tinseth (VP marketing, Boeing Commercial Airplanes, Seattle).

The firm has decided to deliver 100 777 aircrafts and 120 Dreamliners in 2013, which is more than their average pace of production. Therefore, it is expected that the firm's stock price will improve as it shows that it has the capability to meet the increased demand.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.