Shares of Boeing (NYSE:BA) popped after the global air and defense giant reported robust fourth-quarter numbers which were essentially flawless across the board. You had the biggest earnings beat in several quarters for Boeing, and the biggest revenue beat in several years. You had record revenues and profits in Q4, and record revenues, profits, and cash flow in 2018. Every operating segment reported above-average and double-digit revenue growth, alongside robust margin expansion. The guide was strong. BA stock jumped 6.25%.
Overall, it was simply a fantastic quarter. And it came on the heels of other industrial giants like Caterpillar (NYSE:CAT) reporting weaker-than-expected numbers.
In the big picture, strong fourth-quarter numbers and a healthy 2019 guide together imply that Boeing stock will hit all-time highs in 2019. The share price peaked a year ago. Then, as 2018 wore on, global growth concerns stung the stock, driving down the shares some 25%. BA stock has since rebounded but it’s still not near those record highs.
Frankly, there’s no reason this stock shouldn’t be at peak prices. The company is firing on all cylinders and underlying trends imply that this strength will persist for a lot longer. Against that backdrop, Boeing stock should trade north of $400.
It will. As 2019 rolls on, equities will broadly head higher and Boeing stock won’t be an exception. By the end of the year, this stock could be closing in on $450. As such, buying here below $390 seems like a pretty good idea.
Boeing’s Q4 Numbers Were Great
Across the board, Boeing’s Q4 report was nothing short of exceptional.
To cap off a year that had record revenue, profits, and cash flow, Boeing reported quarterly numbers that included record revenue and profits. Revenue rose 14% year-over-year, and operating margins expanded 310 basis points (bps). The commercial airplane deliveries grew by 14%, above the 6% 2018 pace. Margins expanded 400 bps due to a favorable product mix, and the backlog remained enormous at ~$410 billion.
The defense, space, and security business grew by 16% in the quarter, better than 2018’s 13% growth rate. Margins expanded 60 bps, also thanks to a favorable product mix. The backlog remained robust at ~$60 billion. It was the same story in the global services business. Revenue growth was big (29%) and above average (17% growth in 2018), while margins expanded 30 bps.
The guide was also strong. All three businesses (airplanes, defense, and global services) are expected to grow revenues next year at a healthy clip (3% to 13%), while margins at all three segments are also expected to expand, including about 500 bps of margin expansion in the defense group. Total revenue growth is expected at 9% next year, and core EPS is expected to rise 25%.
Overall, the quarter was phenomenal. While the global economy is slowing, Boeing isn’t. At all. If anything, things are getting better at the company. This speaks to the strength of Boeing’s secular growth narrative, and the company’s (and BA stock’s) ability to withstand broader economic noise. That’s a good thing which positions Boeing stock for further gains in 2019.
Secular Drivers Imply Continued Strength
Boeing is well entrenched in several secular growth industries.
On the airline front, global travel demand is expected to surge over the next 20 years due to global urbanization and a shift towards an experience-driven consumer economy that values travel. As this demand grows, demand for new equipment will increase, too, and Boeing’s airplane numbers will only get bigger.
Meanwhile, defense spend is another thing that won’t go away anytime soon. While it may be volatile depending on the geopolitical situation, defense spend won’t ever dry up or drop in a big way. Instead, it will grow fairly consistently with the broader global economy.
When it comes to space, investment into commercial space travel will only pick up over the next several years, thanks to improving technological capabilities and growing consumer interest in space travel. This growing interest will inevitably push Boeing’s numbers higher. Also, the air mobility market is a highly undervalued and underappreciated aspect of Boeing that could provide a huge boost to BA stock.
With its reach into such a broad range of secular growth industries that won’t slow in the foreseeable future, Boeing’s growth trajectory should remain healthier for longer.
Prices Above $400 Make Sense In 2019
In the big picture, Boeing stock deserves to trade above $400, and it will likely hit those levels this year.
The company’s airline business is a 3%-5% grower over the next several years, while the defense and space businesses are probably 5% growers. Flying cars could add a few billion dollars in revenue, while the global services business should continue to grow at a high single-digit to low double-digit rate.
Putting all that together, roughly $135 billion in revenue seems achievable by 2024. If revenue does head towards that level, that will allow for natural operating leverage, while gross margins should also trend higher due to favorable product mixes. Consequently, $135 billion in revenue by 2024 could happen alongside 15% operating margins. That combination — plus buybacks — makes $33 in core EPS seem doable by 2024.
Based on a historically average 18x forward multiple, that equates to a 2023 price target for Boeing stock of nearly $600. Discounted back by 8% per year (10% average discount rate less 2% yield), that implies a 2019 price target for BA stock of right around $440, or almost 14% upside.
Bottom Line on BA Stock
Boeing’s blowout fourth-quarter earnings report underscores that the BA growth narrative isn’t entirely dependent on global economic growth. Instead, because demand for the company’s products are benefiting from secular trends, the Boeing growth narrative will remain healthy for the next several years, even if the global economy slows.
That reality implies that Boeing stock should trade at all time highs. It will in 2019. Eventually, BA stock will break above $400, and trend toward $450.
As of this writing, Luke Lango was long BA.
