Bull Run Not Yet Over For Boeing

| About: The Boeing (BA)
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The stock price of Boeing (NYSE:BA) and Lockheed Martin (NYSE:LMT) outperformed the benchmark index in the last one year by generating significant returns for investors. Boeing delivered standout returns of around 70%, which is way ahead of Lockheed Martin's 41% return. Going forward, it appears that stock price appreciation will not end soon for Boeing and investors can still initiate a long or can accumulate the stock on declines. It will be interesting to delve into the factors that prompt a bullish thesis on Boeing.

Growing internationally

In the past years, Boeing experienced flattish growth in revenue in the defense segment from the U.S., due to budgetary cuts in recent years. To mitigate the effects of this decline, the company is focusing on increasing its footprints in countries like China, India, UAE, and Australia. With the increasing U.S. dominance over India, Russia is lagging behind in defense agreements, while U.S. companies got $8 billion in defense contracts from the Government of India in recent years. Moreover, the U.S. is close to winning other contracts from India worth $5 billion. A leading Indian newspaper reported that the Indian defense ministry's deal of six C-130J Super Hercules aircrafts, 22 Apache helicopters and 15 Chinook heavy-lift helicopters are about to get complete. These defense deals will give a lease of life to Boeing, which is struggling to increase its revenue in the non-U.S. Defense, space and security segment, while its competitor Lockheed Martin will also see upside in the revenue, as it will also deliver Super Hercules to India. These companies will get the benefits due to a lack of competition, as it is a government-to-government contract and no other companies are involved in it.

Indian defense deal

Defense budgets in European countries remained stiff due to adverse economic conditions and political pressures on the governments. However, growing Asian countries are expected to offset this trend by raising their defense budgets. Deals with India will be signed in the current financial year, and Boeing will supply its Apache helicopters and Chinook helicopters in the next fiscal year or so. Apache helicopters have long distance weapons range and accuracy, and are best in class, while multi-mission Chinook helicopters are the choice of air forces around the world due to their utility. I believe that these dual purpose helicopters suit the Indian conditions as they can used in the natural calamities and can be used in the supply of troops, artillery, ammunition and more. Earlier in August 2013, the U.S. Government signed a $500 million contract with the Indonesian government for supplying Boeing's eight AH-64E Apache helicopters. Boeing generated around $5.6 billion from the Non-U.S. defense, space, and security segment in the last year, which was anticipated to remain flat in the next year. However, due to these defense deals the company's revenue will significantly increase in the current fiscal. Hence, I remain optimistic on the company's revenue generation capacity in the international defense market in the upcoming years.

On the other hand, Boeing's rival Lockheed Martin's 80% sales come from the U.S. However, Lockheed Martin is observing a slump in the country. The company also is focusing on international expansion to diversify its portfolio and remain sustainable. In the current fiscal year, it bagged an order from Iraq to deliver F-16 fighter jets, which means a monetizing opportunity of roughly $830 million. The company also received a contract from Saudi Arabia, and is expected to get new orders of $1.2 billion from India. Once the deal is signed between India and the U.S., Lockheed Martin will deliver its Super Hercules aircraft and generate revenue. It seems that this deal is significant for India, due to the country's frequent problems with China and Pakistan. Last month, India landed its Super Hercules near its international border with China to resist against a move from its counterpart. Lockheed Martin's expansion in the international market will drive its revenue higher in coming years.

Commercial segment

On the other hand, Boeing is leading in the twin-aisle airplanes over the European giant Airbus. In the second quarter, the company delivered 169 planes in its commercial segment, and around 414 aircraft in the current fiscal. Below is the list of net order growth for Boeing:

Source: Company data

Boeing received an additional 124 orders for the twin-aisle airplanes, which includes the 787 Dreamliner and the 777 in the current year. Airbus received orders for 112 twin-aisle airplanes during the same phase, and is lagging behind Boeing. The company has maintained its delivery rates higher, due to ramping up its production. Boeing has delivered 414 commercial airplanes so far this year, while Airbus has delivered 394, which again gives competitive advantage to Boeing over its biggest rival in the commercial aerospace segment globally. The company generated revenue of around $49 billion in the last year from its commercial airplanes segment, which I expect it to grow by 3%-4% in this year, which will drive investor's confidence in the company. Also, Boeing has shown significant increase in the commercial segment in past years, which is one of the factors to consider while making an investment decision. Since the economic crisis, the company has been a standout performer as far as bagging orders is concerned, and is growing at a handsome rate.


I keep stock valuation as my preference while selecting a stock for investors; let us analyze the valuation of Boeing and Lockheed Martin.

Source: Finviz

There is a wide difference between the valuations of both these companies. PEG ratio of 1 is desirable, but Boeing has an edge over Lockheed Martin as it has a PEG ratio of 1.69. The price to free cash flow metric prompts me to say that Lockheed Martin has higher Price to free cash flow, which indicates an expensive stock and can reverse. Investors and traders remained short on Lockheed Martin as it has a short interest ratio of 4.91, which is significantly higher than that of Boeing. Boeing will be able to generate higher EPS next year and in the next five years as well, as it is expected that its EPS growth will remain around 11.61% for the next year. Again, Lockheed Martin lacks in EPS growth; both short term and long term, which is not desirable from an investor's point of view. Lastly, the company having a higher profit margin is desirable and once again, Boeing leads the list by having a profit margin ratio of 8.60%. Considering all these valuation metrics, investors can easily choose between the two companies when considering an investment.

Street's expectation and recommendation

Source: Finviz

I consider street’s expectations and recommendation every time I write about a stock, so as to substantiate my views and provide guidance for investors to rely on. Carrying this, I looked at the street’s recommendation, which is bullish on this stock and has upside potential of around $125 a share.

Stock performance

Source: YCharts

In the above one year chart, the stock of Boeing has outperformed in the last year over Lockheed Martin. Moreover, Lockheed Martin has also lagged in the five-year performance in-comparison to Boeing, which means investors betting on Boeing made more bucks than investors of Lockheed Martin have. The surging commercial segment of Boeing and expected defense deal will further fuel the growth of Boeing, while its competitor Lockheed Martin’s overdependence on the U.S. will halt its growth in the short and medium term. Additionally, the valuation of Boeing is far more attractive than that of Lockheed Martin


With Boeing’s current stock price at $119, I believe that the stock has potential to trade at above $125 due to its strong fundamental factors and attractive valuations. On the other hand, struggling Lockheed Martin’s revenue will increase on the strength of its Indian contracts, but its valuations and stock performance are not catchy. I recommend investors to go Long on Boeing, while Lockheed Martin is still a laggard in aerospace and should be avoided.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.