Boeing (NYSE:BA) has announced a joint venture with Embraer (NYSE:ERJ) of Brazil that gets it back in the small jet market. It’s a move that could even better shield Boeing stock during shaky financial times.
The $4.75 billion joint venture, of which Boeing will own 80%, was hailed by investors, although Embraer was assumed to have gotten the short end, its shares falling 10%.
What that means is you can expect some renegotiation before closing in about a year, but Brazil’s government has already signaled its approval, understanding that its military jets will also likely get a Boeing makeover.
For Brazil, whose GDP has plummeted from $2.6 trillion to $2.1 trillion during this decade, it means stability and a return to growth. For Boeing, it means it can go toe-to-toe with Airbus (OTCMKTS:EADSY) in the growing niche of short-haul travel, which could also bring service to more U.S. cities.
Getting More Competitive with Boeing Stock
The last decades have been dominated by Boeing’s rivalry with Airbus, with the U.S. company becoming a huge defense contractor to offset Airbus’ European government subsidies. But both companies have stubbed their toes in recent years with huge jets like the Boeing 747-8 and Airbus 380 , which can take many hundreds of people halfway around the world.
Airlines have been preferring the Bombardier CSeries from Canada and Embraer EJet family from Brazil, which handle fewer than 100 passengers but are profitable on short-haul flights. Small planes let airlines re- establish profitable service between small markets and their major hubs.
Boeing howled in 2017 when Airbus acquired a majority stake in the CSeries, so the Embraer deal was a natural response.
Ready for China?
Both players know they face new competition in the next decade from China, whose Comac C919 will go into full production in 2021, competing directly with the Boeing 737 and Airbus 320. As in other markets, like cloud computing, China will lock out foreigners with the C919, and then try to undercut them in their home markets.
Japan, meanwhile, will be entering the Embraer-Bombardier market in 2020 with the Mitsubishi Regional Jet , a joint-venture with Toyota (NYSE:TM).
Both the larger and smaller players in these joint ventures have reasons for linking up.
A Boeing Stock Buying Opportunity
Under Dennis Muilenberg, who became CEO in 2015, Boeing has achieved increasing profitability, but no growth.
He now delivers almost 10% of revenue to the bottom line, $8.2 billion on $93.2 billion in sales during 2017, $2.48 billion on $23.4 billion in revenue during the March quarter.
Analysts are expecting even better profitability for Boeing stock when it reports July 25, something along profits of $3.41 billion on revenue of $23.47 billion.
The profits are steady enough for Boeing to deliver a fat dividend of $6.84 per year, yielding 2.02% at the July 6 opening price of $331 per share.
Boeing stock is up over 50% from the $202 per share of a year ago, but well below the all-time high of $370 per share achieved in June, which Barron’s called a buying opportunity. Our Thomas Scarlett agreed, calling Boeing’s fall on trade war talk overblown.
The Bottom Line on Boeing Stock
Boeing has been a stock market star this decade, tripling in value over the last five years, and more than doubling the quarterly dividend. An income investor who paid $103 for a share five years ago is now getting a 6.6% yield on that investment.
Your mileage will vary. There are new risks in Boeing stock. But if you keep with it for a decade, my guess is you will be richly rewarded. Military orders aren’t disappearing, there’s a full product line, and while trade wars hurt in the short run, they end.
For those with a long-term horizon, this is a big buying opportunity.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
