Boeing (BA) has been a busy company in the month of October. In the first week of the month, the company had to resolve labor tensions after employees rejected a four year contract offer, on the basis that the renewed contract offered a lesser wage raise than what the company had previously offered. Recently, the company also announced that its 737 Max series has been a big hit, through which the company has been able to secure more than double the orders that Airbus was able to secure in the first nine months of the year. However, the most important news has been that the company has taken control of the supply chain of the Dreamliner, which has increased its chances of achieving a production increase in the much criticized 787 Twin Aisle Jet.
Time and again, Qineqt has pressed on the issue that industrial stocks take a hit when deliveries are not on time; Boeing's stock is no exception. The late deliveries of the 787 Dreamliners have been deeply criticized by the market. After a long delay, Air India received the first of its 27 jets on 6th of September. This is why the company's stock remains stagnant despite winning big orders from different airlines around the globe. Last Thursday, the stock price went up by less than one percent on the announcement of a $5 billion order from Alaska Airlines (ALK).
Last week, the company announced that the supply chain of the Dreamliner is now largely under the control of the company. Earlier, much of the delay in the production of the Dreamliner was caused by the fact that the manufacturing of the jet's components were being outsourced to 325 suppliers around the globe. Consequently, it took a lot of time and effort to simultaneously deal with all of them.
Currently, the company makes 3.5 such jets each month. This has improved from June's manufacturing rate of only 3 jets per month. In order to benefit from the increase in global demand for jets in the next 20 years, Boeing will have to increase its production accordingly; otherwise, it will have to pay the penalties. We have already discussed how the company lags in its production due to its huge backlog. The following chart taken from one of the earlier articles shows the targets of the company in the future:
The backlog of the Dreamliner has been the most criticized in the market among all other backlogs that Boeing has. Given the current backlog of 840 jets, it will take the company 20 years to produce them at the current rate of 3.5 jets per month. On the other hand, a rate of 10 jets per month will help the company clear the backlog in only 7 years. It becomes clear why investors have been so anxious about the company's production rate.
Recently, the company also confirmed that the Dreamliner's stretched version, the 787-9, which is longer than the standard 787-8 and can host 16% more passengers in a single flight, is all set for a test flight in the second half of 2013. The jet will be delivered in 2014. This is the same jet about which AMR Corp (AAMRQ.PK), the parent of American Airlines, has cautioned that the company may not be able to deliver the jets on time. AAMRQ ordered 42 of the 787-9 planes in 2009 with the delivery promised in 2014.
Airbus sold only 382 planes in the first nine months, 57% less than the 879 planes sold by Boeing. Not only that, Boeing has also been faster in terms of deliveries. The company delivered 436 planes YTD as compared to Airbus, which delivered only 405.
Figures show that Boeing is well on its way to become the leading commercial aircraft manufacturer of the year. The spot was lost to Airbus last year, when Boeing was late in bringing its fuel-efficient model to the market in response to Airbus' A-320 neo planes. Since the introduction of the 737 Max series in the market, Boeing has signed delivery orders worth billions of dollars.
The stock is trading at a forward multiple of 13x. It pays a healthy dividend yield of 2.5%. The stock is expected to grow as production issues are resolved by the management. The company will announce its earnings on the 23rd of this month. The sell-side expects the company to announce EPS of $1.13, down 22% YoY. However, the sell side also expects earnings to grow at 10% per annum for the next 5 years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.