October 14, 2011
Written By Steve Christ
“One company I’ve been watching as of late is Boeing Co. (BA – yield 2.60%). For investors with a long-term time frame, this aerospace giant offers the safety of rock-solid growth with very little downside— especially as it bounces off support at the 200-week moving average. Not only is Boeing a great company, but it’s a global leader in a space that America still dominates. When it comes to designing and manufacturing aircraft, Boeing is a company with few peers—especially when it comes to commercial aircraft. Here’s why.
“At $200 million a copy, Boeing’s most recent piece of aviation history took off yesterday morning from a runway in Seattle, the same place it was assembled. After a three-year delay, the world’s first carbon-composite passenger jet lifted off into a murky gray sky headed for Japan, marking the first delivery of Boeing’s much- talked-about 787 Dreamliner. Billed as representing a ‘nearly two generation jump’ in commercial aircraft technology, the morning flight marked the finish line in a long struggle to deliver one of these marvels. The Dreamliner is the first plane ever to have its entire fuselage made of carbon composites, rather than aluminum sheets that are held together with some 50,000 fasteners. Along with its new engines, these design features help to give the plane a dramatic boost in speed and efficiency, allowing it to use considerably less fuel. Clean and green, the Dreamliner burns 20% less fuel than a comparable aircraft—a huge plus in a world where airlines are often rocked by fuel price increases. What’s more, Boeing projects the plane’s revolutionary design can remain in service for 50 years, adding roughly 20 more years to the life cycle of each plane.
“As for passengers, the company promises a much- improved interior environment: higher humidity levels, bigger overhead storage bins, and a new wing technology that makes for a much smoother ride. Given these gigantic improvements, Boeing has had a hit on its hands long before the first Dreamliner ever rolled down the runway. To date, the Dreamliner is actually Boeing’s best-selling airplane of all time, with 820 planes already on backorder representing $145 billion in future sales.
“As the company’s first new jet in 16 years, Boeing believes it was well worth the wait: ‘This has not always been a smooth journey,’ Boeing Commercial Airplanes President Jim Albaugh told a crowd of hundreds of employees, airline executives and politicians recently at the Everett plant. ‘But nothing important ever is.’
“From this point forward, Boeing has ambitious plans to ramp up production into 2013 to crank out 10 Dreamliners a month, up from the current two. At current prices, that means Boeing hopes to add nearly $24 billion to its top line over the next two years if it can meet those goals.
“That gives today’s investors the chance to buy Boeing at a discount, since the ongoing delays knocked 15% off Boeing’s 2011 earnings, helping to keep its share price down. The upside is that the sales growth added to Boeing’s earnings by Dreamliner sales won’t begin to hit until next year. CEO Jim McNerney recently said the plane will actually be profitable from the first day, since the input costs per plane are not generating a loss on each delivery.
“According to analyst consensus, this translates to an increase in earnings per share by 23.6% and 18.7% (respectively) over the next two years. That adds up to $5.24 a share in 2012 and $6.21 a share in 2013. At 13.5 times earnings, that gives Boeing a reasonable price target of $84.24 a share. And at today’s prices, that leaves 35% upside from here. That doesn’t include the dividend, which at 2.7% is well above the market average and has grown by an average of 6.5% annually over the past 20 years.
“By the way, this isn’t exactly my first call when it comes to Boeing. In July 2010, I recommended Boeing as a buy at $62 a share with a price target of $74.25. It hit the mark seven months later, eventually reaching $80 a share before the run ended as the market topped in April. Thirteen months later, this one is even easier—provided you can handle the market turbulence.
“But it’s not just all about the Dreamliner. The narrow- body aircraft segment of the business is also one of Boeing’s strengths. The company forecasts global demand for 23,370 new aircraft in the segment over the next two decades at a value of U.S. $1.95 trillion.
“That figure represents 70% of the total of 33,500 new planes that will be put into the skies in the next 20 years, or 48% of the combined $4 trillion market value of all new aircraft purchased over that period.
“The Boeing B737 Max is an important part of this market. In fact, Boeing has secured 496 orders for the B737 Max from five airlines since its August 30 launch. So when you add it all together, Boeing is exactly the type of company investors should be willing to go long during this down turn.
“As a result, our recommendation is as follows: Buy Boeing Co. under $62/share with a 10% stop loss. Price Target: $84.24. We are going to add Boeing to the dividend portion of the portfolio as a long-term hold.”
Steve Christ, The Wealth Advisory, 10/7/11