Boeing (BA) stock is down about 15% from its highs earlier this year, as concerns of slowed global growth and decreased demand for new Boeing aircraft has created some fear among investors.
To make matters worse, Delta Air Lines (DAL) CEO Richard Anderson recently used the word “bubble” to describe demand and the market for wide-body jets, including BA’s 777 aircraft.
However, the recent stock loss combined with a decline in shareholder sentiment creates the perfect opportunity for new money in Boeing stock right now.
Wide-Body Bubble Means Little for BA Stock
Unless you are a Boeing stock owner, of have an understanding of BA’s business model, you probably don’t realize that BA is hardly affected by month-to-month, even year-to-year changes in demand.
Fact of the matter is that all of BA’s revenue created this year is from past orders, and orders it is receiving today won’t be fulfilled, in some instances, for nearly a decade. That’s because BA’s backlog is so large.
BA consistently updates all of its unfilled orders, and as of Oct. 13, approximately 70% of its unfilled orders were for narrow-bodied 737 planes. The planes noted by Delta’s CEO accounts for just 10% of BA’s orders.
With 4,243 orders for the 737, and BA producing just 42 per month, BA has more than enough work to keep it busy for nearly a decade, regardless if wide-body jets are in a bubble.
China Is the Focus for BA
Albeit, Delta may be right about wide-body jets in North America, but one thing its CEO can’t accurately predict is demand in China. That’s because Delta does not have the presence in China to know what kind of macro demand exists. Notably, China is now Boeing’s biggest opportunity, along with India later down the road.
In Boeing’s market outlook report it predicted that between now and 2034 that China will spend $950 billion on new airplanes, where single-aisle air-crafts will account for more than half. The other half is expected to be wide-body planes.
While Boeing won’t gain this entire market itself, it will get a fair shot due to its existing 50% market share of aircraft production in China. Back in September, BA signed a deal in China for 300 planes, both wide-body and narrow-bodied, showing that BA is wasting no time in making a large footprint in China.
Why BA Stock Is a Buy
With over 100 months of production time needed for its current backlog of 737s, and its backlog growing, there aren’t too many companies in the world that present this level of long-term assurance for investors. Not to mention, BA has another 541 and 768 orders for the 777 and 787, respectively, much larger planes that take even longer to produce.
BA’s solution is a new factory to increase production, in China. Looking ahead, BA has already upped production for several plane types, but must also increase production as China grows to a larger percentage of its backlog in order to keep costs in check. By positioning itself in China, BA can keep up with demand while also boosting production and revenue growth.
That said, BA is a free cash flow machine, having seen its FCF rise 270% over the last five years to $6.7 billion over the last four quarters. Therefore, BA trades at less than 14 times FCF.
For a company that has BA’s level of future security, and pays a dividend yield of 2.6%, 14 times free cash flow is a small price to pay, and represents a terrific entry point in Boeing stock for long-term investors.
As of this writing, Brian Nichols was long BA.
