by Jonathan Berr | January 29, 2014 3:03 pm
Whenever a Wall Street darling issues earnings guidance that doesn’t meet Wall Street’s lofty expectations, analysts will occasionally urge investors to ignore the forecast because the company is being “conservative.” That seems to be the case with Boeing (BA), today.
Since 2011, BA stock has raised its earnings guidance every July and October like clockwork. Though I am not suggesting anything improper, such a predictable cycle of continually raising earnings guidance is unusual and it raises the question of why BA doesn’t issue higher forecasts to start. The pattern can’t be ignored and is a clear signal for investors to buy BA stock.
Indeed, investors who ignored the company’s pessimistic outlooks and the media criticism regarding the Dreamliner delays and other issues have made out well. BA stock has surged more than 200 percent over the past five years and has more room to run.
Analysts have an average 52-week price target of $153.70 on BA stock, indicating a 17% upside. The stock trades at a reasonable multiple on forward earnings of about 20, which seems reasonable, although that is a premium to other industrial names such as General Electric (GE), which trades at a valuation of 15 , and United Technologies (UTX), which the market values at 16.
Still, BA stock is worth the money. In the current quarter, Boeing’s revenue is expected to surge more than 17%, more the double the growth expected for GE or UTX.
One reason why Wall Street has been keen on BA stock is on the 787 Dreamliner. The much-delayed aircraft is 20% more fuel efficient than similarly sized aircraft. For airlines, which live and die on fuel costs, that is a huge deal.
Demand for the jetliner has remained surprisingly robust, given the embarrassing publicity the company endured after regulators ordered them grounded in the wake of engine fires. The company expects to deliver 110 Dreamliners in 2015 — nearly double the 65 it sold in 2013. Airlines also are keen on the company’s long-range 777-X. China’s Cathy Pacific placed an order valued at $7.5 billion for the aircraft in December, becoming the fifth customer for the aircraft.
Thanks to the 787 and 777-X, Boeing had a backlog of $441 billion, an increase of $51 billion from a year earlier, reflecting $48 billion in net orders. The company forecast deliveries of 715-725 aircraft. Earlier this month, the machinists union agreed to accept wage and retirement concessions in exchange for Boeing’s pledge to build the 777-X in Washington state.
Though some analysts have expressed concern about a lack of new aircraft — Boeing began selling the 787 and 777-X last year — that view appears to be short-sighted given the growing strength of the world’s airlines. According to the International Air Transport Association, passenger demand is expected to increase at a compound annual growth rate of 5.4 percent over the next five years, exceeding the 4.3% CAGR seen between 2008 and 2012.
Boeing’s defense business also has held up surprisingly well despite cutbacks at the Pentagon. Strong demand from overseas boosted revenue at the company’s defense, space and security business by 6.1 percent to $8.86 billion. Even more impressive was the gain in operating profit margins t0 10.8 percent.
Boeing’s Military Aircraft business and its Network and Space Systems units both posted double-digit revenue gains. The defense industry was hurt by the automatic sequester spending cuts which have since come to an end thanks to the recent budget agreement between President Obama and the Republicans in Congress.
Predictably, though, CEO James McNerney struck a cautious note:
“For 2014, we remain focused on maintaining our commercial airplanes market leadership, strengthening and repositioning our defense, space and security business and continuing to meet the needs of our customers by improving productivity, executing to development plans and delivering our unmatched portfolio of innovative aerospace products and services.”
Unlike many CEOs, McNerney can back up his words with deeds. Given the strength of its commercial airline business and the resilience of its defense operations, the time to buy BA stock is now before it takes off for higher valuations.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.
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