by Tom Taulli | November 19, 2013 9:30 am
Shares of Boeing (BA) have been flying high in 2013, with BA stock up a sizzling 84%. While the Dreamliner has been plagued with problems — which was a drag on Boeing stock from 2010 to 2012 or so — it looks like the company is finding ways to get things back on track.
At the same time, there is tremendous excitement for the 777X family of aircraft. Over the next 20 years, this could represent solid growth for the company and Boeing stock.
Yet with BA stock already up a lot, is it time to be cautious now? Or is there more room left on the upside? To see, let’s take a look at the pros and cons:
Global Powerhouse. On a combined basis, BA is the world’s largest manufacturer of commercial jetliners and military aircraft. But the company also has a line of other businesses to help Boeing stock move higher, such as businesses for missiles, satellites, launch vehicles and even security software. BA customers span about 150 countries. And to keep innovating, Boeing also has a talented work force. Consider that 35,000 employees have advanced degrees.
777X Family. This is the BA wide-body jet that provides the latest in technology (such as 3D printing) and substantial fuel savings. It also has certain designs that should avoid delays. So far, it looks like the 777X is a big hit, as seen at the Dubai Airshow. BA snagged $95 billion in orders from customers in the Middle East, which was twice as much as Airbus. The company expects to deliver the 777X in 2020. In fact, the Middle East represents a huge growth opportunity for BA and Boeing stock. Keep in mind that the region is looking to expand its economies beyond oil, which will require a much better airline infrastructure.
Financials. With rising orders, cash flows for Boeing stock have been ramping nicely. They came to $8.3 billion for BA in the first nine months of this year, up from $4.9 billion in the same period in 2012. But BA also has a disciplined program of cost cutting and productivity initiatives. To this end, it has continued to implement policies like lean manufacturing and ongoing improvements in the supply chain that should also help earnings and BA stock.
Labor. The situation has been rocky for some time. To boost margins, BA has been trying to find ways to cut back on labor costs. For example, the company is looking at not building the 777X jetliner in Puget Sound. In other words, there is a possibility of work stoppages, which could make it tougher to meet production levels. About 39% of BA’s workforce is unionized. That could weigh on BA stock in the future.
Competition. While the 777X will be a nice driver for growth, BA arch rival Airbus is no slouch. The company’s A350 and A380 jets are great alternatives. In fact, Airbus has been getting traction in markets where BA has been dominant, such as in Japan. As for Europe, Airbus may also get more traction because of concern over the influx of orders in the Middle East. Why? Well, the governments are providing lots of subsidies for airlines in the region, which may put European carriers at a disadvantage. In light of this, they may instead prefer to support Airbus. If that happens, it could hurt Boeing stock down the road.
Defense Industry. Nearly 40% of overall revenues come from this segment. It’s true that BA is focused on critical areas like unmanned systems, intelligence, surveillance, reconnaissance and cyber security. It also helps that the company has a good track record in terms of affordability and maintaining schedules. But still, it seems likely that the U.S. defense budget will undergo continued pressure, as seen with the latest budget battles. That should concern Boeing stock investors. Besides, the sequestration process will get even worse in 2014. With a shrinking pie, it will get tougher to compete against tough rivals like Northrop Grumman (NOC), Lockheed Martin (LMT) and General Dynamics (GD).
There are definitely some headwinds for BA stock. After all, over the coming years, it will get tougher to find growth in the U.S. defense market and the company’s tough tactics may result in labor strikes. That could definitely take some air out from under Boeing stock.
Then again, the BA commercial airline business should offset the potential problems. For the most part, the company has continued to innovate and invest in new technologies. And the demand for commercial aircraft should continue for the long haul. According to Boeing’s own estimates, the purchases of planes are expected to come to over 35,000 for the next two decades.
But the biggest problem for Boeing stock investors: Wall Street has been considering this in the value of BA stock. In fact, shares of Boeing stock are now trading a pricey 25 trailing. Consider that this is near where tech superstar Google (GOOG) is trading! What’s more, the BA dividend is now only 1.4%.
Given all this, it is probably better to wait for a pullback before buying Boeing stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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