by Tom Taulli | July 9, 2012 1:40 pm
On the first day of the Europe ‘s mega air show, Boeing (NYSE:BA) got some nice news. It announced a $7.2 billion order for its 737 Max airliner from Air Lease Corp. (NYSE:AL). It also looks like Boeing will snag another deal with a major lease operator.
Yet investors aren’t impressed. The shares are up only about 0.5% in midday trading. In fact, the gain for the year is just under 1%.
So might it be a good time to pick up some shares and get an attractive valuation? To decide, let’s take a look at the pros and cons:
Global Powerhouse. Of course, Boeing is a long-time developer of commercial aircraft. Besides this, the company provides aviation support services, such as upgrades, training and technical advice.
Boeing also has a large defense business in the development of fighters, bombers and unmanned aircraft. It even develops missile defense systems, space and intelligence infrastructure and satellite launch vehicles.
Financial Strength. While Boeing carries $12 billion in debt, it’s still highly liquid. The company has about $10.5 billion in the bank and generates strong cash flows, which came to $4 billion last year. Boeing also pays a decent dividend, currently about 2.4%.
Secular Trends. The prospects for commercial aviation look promising. According to Boeing’s own research, the long-term growth in passenger traffic is about 5% per year. The same goes for air cargo.
Based on this, Boeing predicts that there will be demand for 34,000 new planes, with a total value of $4.5 trillion (over the next 20 years). The main factors include the growth in emerging markets and the natural replacement cycle for older planes.
Competition. Boeing’s main rival is the Airbus unit of Europe’s EADS (PINK:EADSY), which is certainly a tough rival. But it also faces other threats from smaller players like Bombardier and COMAC, which is based in China.
Defense Industry. Roughly half of Boeing’s revenues come from this business. And yes, this is a big issue. It seems inevitable that the U.S. government will cut back on the defense budget. As a result, Boeing will need to fight hard to get contracts against competitors like Northrop Grumman (NYSE:NOC), Lockheed Martin (NYSE:LMT) and General Dynamics (NYSE:GD).
Macro Situation. More and more, it looks like the global economy is slowing down. It probably won’t mean a plunge in orders for Boeing since its customers tend to focus on the long haul. But there could still be some pushback on the size of contracts.
Boeing will certainly be a major beneficiary of the steady growth in the aviation sector. True, the company has stumbled — such as with the repeatedly delayed Dreamliner — but it’s still focused on innovation and quality.
But the big problem is the defense business, which is likely to come under strong pressure. So much so, that it’ll dilute the positives from the aviation segment.
So, in light of this — and given the impact of a possible global slowdown — the cons outweigh the pros on the stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO. Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.
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