Boeing: Ready for Take-off

Boeing (BA) seems to have found large support in the range of $63 (I wish I posted this $4 ago). Hopefully, we will see this range again as some random event causes oil to spike and market to fall back from this 500 point rally.

This call is based on the hypothesis that fears of order cancellations are overblown. I think that this recent SURGE in airlines can result in stock being issued to afford these new fuel-efficient planes. However, this call does not depend on such a scenario.

The Numbers:

• FY 2008 EPS Estimate is $5.92, giving it a 11.4 P/E
• FY 2009 EPS Estimate is $6.97, giving it a 9.7 Forward P/E
• The growth rate between FY 08 and 09 is 17.7% growth rate and a 0.55 PEG ratio
• 3-5 year growth rate is expected to be 32.9%, giving it a long-term 0.29 PEG based on FY 09 P/E
• The current TTM P/E, 11.77, is the lowest for BA in at least 5 years
• With a backlog of $350+ billion, the company is trading at 1/7 of backlog

Don't forget the gigantic stock buyback. It has been easy to forget about the $7 billion buyback since the stock has fallen from about $120 since last year. However, this stock buy back is 14% of the outstanding shares at this valuation. On top of that, you can pick up a $0.35 quarterly dividend. Nothing wrong with a 2.50% yield.

Boeing is bullish on its future too. I reported earlier Boeing's increase in its 20 year projection of commercial airline deliveries. I can see this translating into bullish guidance when BA reports on July 23.

Boeing is a globalization play. The recent news of sales to China for $6.3 billion and many billions more to the oil rich countries support this.The orders beat many analyst forecasts.

(As a side note, I believe in world economies bonding. We have seen the fallout of the Latin American, Russian, and Japanese economies spill over and hurt the rest of the world. The world is more correlated today than before: exports are growing as a larger portion of world GDP. Where is all this decoupling garbage coming from? The bonding of world economies is more true today than ever before. )

BA also seems to have some of the best technology. I am not just talking about the new Dreamliner. Recently,

Boeing Co. said if the U.S. Secretary of Defense picks its 767-based tanker, instead of a rival Airbus A330-based model from Northrop Grumman Corp. and EADS, the U.S. Air Force could save more than $40 billion in fuel bills over 40 years.

In a study paid for by Boeing and conducted by Conklin & de Decker Information, Boeing said, it was determined that the heavier A330-based tanker consumes 24 percent more fuel per trip than its 767-based tanker model.

Also important to note, BA might win back the controversial tanker deal it lost last year. This would be an astonishing turn of events.

Lastly, I must mention the Dreamliner progress. Although, the Boeing team successfully increased its 737 production, the 777 Freighter and the 747-8 programs remain on track, not all is well. The 787 has been pushed back repeatedly and there are fears that it will hurt economic prospects. It will actually take some time for the 787 to be profitable. Initial estimates are break even as the learning curve needs to be built up. More importantly, we have not heard of anymore set back. I am forced to assume they feel comfortable with the current first flight buffer so we will not have anymore delays

Overall, the aerospace industry is an oligopoly. Both BA and Northrup Grumman (NOC) have tons of pricing power so I do not see raw material costs affecting that is affecting so many other companies. Surprisingly, BA operating margin for commerical plans has been growing strongly. Last quarter, BA reported in Q1 2008 that operating margins expanded to 11.3% from 9.3% from Q1 of 2007. Boeing estimates an overall operating margin of 10.5% in 2008 and growth above that in 2009.

This is a chart of BA's stock price and rolling EPS:

click to enlarge

 

Also pension expenses are said to be $300 million lower in 2009 vs. 2008. In Q1, BA offer 2009 guidance between $6.80 and $7.00, below Wall Street estimates, but Boeing has historically been a conservative company, raising forecasts in Q2 and Q3.

Although, industrials are hated at the moment, I believe Boeing is poised to outperform over the next 12-24 months.

Disclosure: None

Comments

[DutchMark]

I'm bullish on BA too, but when you say

"However, this stock buy back is 14% of the outstanding shares at this valuation."

I'd recommend taking off those rose-colored glasses. Did they buy back 14% of shares? No. So why make it look like that? They could have, maybe, possibly, had they timed the bottom of the recent slide of the stock. But in fact the number of average diluted shares is down only 4% YoY.

Mark

[DomenicStrazzulla]

Hey Pawel,

interesting article - shoot me an email at domenic@domenicstrazzu... when you get a chance

[DomenicStrazzulla]

domenicstrazzulla.com

[AlphaApprentice]

Dutch, you are correct. My wording was a little off. This buy back will take place over years.

I meant to say that, they buy back is equivalent to 14% of the outstanding shares at today's valuation.

Thanks for pointing it out.

[kkkkkk]

Why should we pay attention to someone who doesn't know that Boeing's quarterly dividend is $0.40/share, not $0.35/share?

[AlphaApprentice]

Typo.