Boeing Co (NYSE:BA) continues its ascent to a comfortable cruising altitude. Although the stock has seen little net growth in the last three months, business conditions continue to improve. Now, the company mulls capacity increases and how to make its most profitable division more profitable. Stronger revenues, a lower valuation and company “problems” have made Boeing stock a buy.
Conditions for Boeing Stock Keep Improving
In an earlier article, I urged buyers to stay away from this otherwise solid company on valuation and revenue concerns. After experiencing ups and downs, BA trades at about the same level as it did when I made that call. It fell back for much of March before coming back some amid a favorable earnings report.
However, a lot can change in three months, and that has been the case with Boeing stock. Earnings of $3.64 per share in the first quarter beat estimates by $1.05 per share. Profit estimates have also risen substantially just from where they were in January. Analysts had forecast $11.90 per share in 2018 profits only three months ago. Today that estimate stands at $14.11 per share.
Estimates for 2019 net income have risen by nearly as much. This changes the entire valuation dynamic, taking the forward price-to-earnings (PE) ratio to 24. On top of that, profit growth for the next two years is expected to average about 15% per year.
Moreover, its revenues for Q1, $23.4 billion, came in $1.18 billion ahead of expectations. They also showed year-over-year revenue growth of 6.6%, reversing the trend I pointed out a few months ago. Analysts also predict annual revenue increases over the next two years. This has helped to further the company’s lead over primary competitor Airbus SE (OTCMKTS:EADSF). Hence, in this short time, both of the concerns I brought up in my last article have now been addressed.
‘Problems’ With Boeing stock
Between capacity shortages and the need to make its most profitable division more profitable, Boeing stock appears to have the type of problems most investors want it to have. Speaking to reporters on Monday, CEO Dennis Mullenberg confirmed this in so many words. Mr. Mullenberg told the media that Boeing is mulling capacity increases for its popular 737. The 737 backlog goes back years, and both Southwest Airlines Co (NYSE:LUV) and Ryanair Holdings plc (ADR) (NASDAQ:RYAAY), who fly only Boeing 737s, recently firmed up their orders for the 737 MAX. Moreover, BA has seen more demand for 747 and 767 cargo planes emerge.
Mullenberg also said the company is focusing on its services business. Services has become Boeing’s most profitable unit. It accounts for more than twice the growth rate as the aircraft services market, broadly speaking. Mullenberg wants to make what he calls “strategic acquisitions” to supplement their “organic portfolio.”
Mr. Mullenberg also wants a part of the trillion dollar industry of servicing aircraft used for commercial and government purposes. Additionally, investments in automation, robotics and artificial intelligence (AI) remain a priority.
The only major “problem” other companies would not want is the one related to the pension deficit. This deficit has taken its price-to-book (PB) ratio to an astounding 162, which puts pressure on balance sheet stability. However, given how conditions have improved for Boeing stock in the last three months, time will tell how deeply the pension deficit affects the company. Regardless, the pension deficit will remain a concern for years to come.
Final Thoughts on Boeing Stock
Even with the pension issues, I think Boeing stock has become a buy. I had previously told buyers to wait for a pullback before buying BA stock. While a net stock price reduction didn’t occur, something better happened. The higher profit estimates lowered the PE ratio and made Boeing stock a better buy. Hence, I have switched positions and I now call this equity a buy.
Financing company pensions remains a serious challenge. However, growth prospects for the company could lessen the severity of the pension deficit. Furthermore, the act of increasing capacity wisely and making strong divisions even stronger are problems that investors want a company to have.
Given its prospects for increasing profits and business for years to come, it is hard to see how an investor could go wrong with Boeing stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
