Boeing (NYSE:BA) announced strong first quarter earnings this April; however, Boeing’s shiny new fleet of 787 Dreamliners has been under media scrutiny after several recent glitches. Will this turbulent debut keep Boeing from a huge 2013? Let’s use our CHEAT SHEET investment framework to see whether Boeing is an OUTPERFORM, WAIT AND SEE, or STAY AWAY?
C = Catalysts for the Stock’s Movement
Boeing’s profit rose 20 percent in the first quarter of 2013. The aircraft manufacturer attributed its success to profitable deliveries of its hallmark 737 and 777 jet models. While battery problems in its new 787 Dreamliner reduced Boeing’s potential profitability, the company still reported a 13 percent increase in year-over-year earnings from its commercial airline division. Additionally, Boeing suppressed worries that the reduction to the U.S. defense budget would hurt earnings, reporting a 12 percent year-over-year increase for its defense, space, and security division. Boeing has set impressive guidance for 2013, expecting revenue to reach up to $85 million over the coming year.
Boeing had a strong showing at the Paris Air Show last week, announcing orders of $66 billion, slightly less than that of its French rival, Airbus. Its 737 MAX, scheduled for delivery in Q3 2017, stole the show; CIT placed 30 orders for the new plane at a value of around $3 billion and Ryanair inked a deal for 175 new 737s at a value of around $15.6 billion. Boeing’s backlog is currently worth around $392 billion, and shareholders all stand to get a piece of it in the coming years.
T = Trends Support the Industry in which the Company Operates
The aerospace industry is growing rapidly in developing markets, specifically China and India. The growth rate in emerging markets is in the double digits, which has helped push the global aerospace growth rate up to 5 percent—nearly double the growth rate of global GDP. Currently, orders from developing markets comprise around half of Boeing’s backlog. Boeing estimates that aircraft sales will total around $4.5 trillion over the next 20 years; with a virtual duopoly it shares with Airbus, investors can expect that Boeing will earn about half of that.
E = Earnings Growth is Mixed
As you can see from the chart below, quarterly earnings have increased year-over-year in three of the last five quarters. The most recent quarterly EPS of 1.44 was a significant improvement from Q1 2012, increasing 18.03%. Because of Boeing’s impressive backlog and recent success in generating new business, in addition to their cost-cutting initiative in their defense, space, and security division, we expect that year-over-year earnings growth will increase moving forward.
|2013 Q1||2012 Q4||2012 Q3||2012 Q2||2012 Q1|
T = Technicals are Strong
Boeing is currently trading at around $102.90, well above both its 50-day moving average of $99.59 and its 200-day moving average of $85.50. Boeing has experienced a strong uptrend over the past six months, trading right around its 52-week high of $104.15. Boeing’s RSI is around 50 suggesting that the stock is not overbought at this time, despite returning 46.6% over the past year.
With $392 billion in backlog, Boeing’s future profitability is all but guaranteed. The aircraft manufacturer has an impressive new fleet of vehicles with the 737 MAX and the 787 Dreamliner that are formidable opponents to its rival, Airbus. The company’s dividend yields 1.9 percent going forward, and with a payout ratio of 34 percent, the company has the ability to increase that dividend in the future. The company has an impressive cash balance of $11.8 billion and a moderate amount of debt of $36.4 billion relative to the industry. Boeing, however, does have a lot of inventory on its balance sheet at around $40 billion, but this is mostly due to delayed rollouts of the Dreamliner. Boeing’s management says that the plane’s earlier mechanical issues are resolved. The company trades at a slightly higher trailing price to earnings ratio than the S&P 500—19.28 versus 18.59—but with the Boeing positioned to capitalize on the rapidly growing aerospace industry, the higher price is justified. Boeing is an OUTPERFORM.
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