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Boeing: Market Research or Market Myth

|Includes: The Boeing Company (BA)

Introduction

Investment research is often similar to baking – it takes many ingredients, time, and a little luck. Without question, however, the end result is a product of its inputs. The “product” of this article should be an illustrative example of why low quality “ingredients” can lead to half-baked research.

 

The Rub

In a recent article published by the AFP, Randy Tinseth, vice president of marketing for Boeing's commercial airplane division, described Boeing’s sales projections for China. In a nutshell, they are as follows:

 

  • China will need 5,000 planes over the next 20 years
  • Boeing aims to maintain its 51% to 52% of the Chinese market

 

According to Tinseth’s projections, if Boeing can maintain at least 50% of the Chinese market, then it will sell 2,500 airplanes to China over the next 20 years. On average, this equates to 125 planes per year. To better understand what Tinseth is projecting, it is worth reviewing Boeing’s airplane order history. The following three charts illustrate total annual aircraft orders, annual aircraft orders by region, and annual aircraft orders from China.

 

 

 

 

In terms of total airplane orders, 2007 was the best year on record for Boeing. In that year, Boeing received orders for 1,244 airplanes including 138 from China. Aside from 2005, 2006, and 2007, never in Boeing history has China ordered more than half of the projected average Chinese order volume.

 

Conclusion

Tinseth’s projections are certainly possible. However, another scenario that seems at least equally likely is that Tinseth is confusing an unsustainable Chinese credit boom with long-lived economic prosperity. Projecting the peak order volume as the going forward run rate seems unrealistically optimistic.

 

Perhaps we should not be judging Mr. Tinseth's projections. After all, he is the VP of marketing and his job is to get us excited about Boeing’s prospects. However, we should truly understand what he is saying before using his data. Just like in the kitchen, rotten ingredients make a rotten cake.

 

Disclosure: No Positions



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