Did you ever notice that sometimes it takes investors a little time to appreciate a company’s performance in a given year? Take Boeing (NYSE:BA) for example. If rated on a scale of one to 10 in terms of financial and business success over the past year, it would have rated a 12. Yet, Boeing stock barely cracked a double-digit total return in 2018 — up 11.7%, including a 2% dividend yield — leaving some to wonder if China had pummeled the world’s largest aircraft manufacturer into submission.
Not by a long shot.
Five weeks into 2019, Boeing stock is up 28% year to date through Feb. 5. As Matt Damon’s character from Good Will Hunting would say, “How do you like them apples?”
Boeing’s record year shouldn’t have come as a surprise to investors. I was talking about its stock as early as April, suggesting a $1,000 stock price wasn’t an impossibility. Now, do I think that’s going to happen in 2019? No, I do not. How about 2020? Doubt it. 2021? Doable but a bit of stretch.
Buy now, and if Boeing management continue to execute at a high level and the economy doesn’t collapse too severely, I would guess 2022 is the year Boeing stock hits $1,000.
So, if you’re thinking about buying its stock, here are seven reasons why you should.
Boeing Reported Record Sales
Boeing went over $100 billion in annual revenue for the first time in 2018; $101.1 billion to be exact, an 8% increase over fiscal 2017. Now, if you think 8% growth isn’t a big deal, consider that works out to a $7.1 billion gain, about the same amount as the alternative asset manager Blackstone Group’s (NYSE:BX) annual revenue.
If Boeing’s revenue growth were an S&P 500 company, it would have finished 398th in 2018. So, you might want to rethink just how good its record sales were. They were otherworldly. And that’s just the top line.
On the bottom line, Boeing’s operating margins increased by 90 basis points in 2018 to 11.9%. For every dollar of Boeing’s $101 billion in revenue, it generated nearly 12 cents in operating profits. In the fourth quarter alone, its operating margins jumped by 270 basis points to 14.7%. Expect them to keep moving higher.
It Should Have a Strong Year Ahead
As good as 2018 was, 2019 is expected to be even better.
Last year, Boeing produced 806 aircraft, a company record. With 5,900 aircraft in its backlog, CEO Dennis Muilenburg is ramping up production. In 2019, it expects to create 895 aircraft, an 11% year-over-year increase. Amazingly, that works out to a plane getting built every ten hours — for an entire year. That’s a blistering pace by anyone’s standards.
Even with increased pace, it will still take Boeing close to seven years to bang out all the orders it has got. It’s a nice problem to have.
“Our One Boeing focus, clear strategies for growth, and leading positions in large and growing markets, give us confidence for continued strong performance, revenue expansion and solid execution across all three businesses, which is reflected in our 2019 guidance,” Muilenburg stated in the Q4 2018 press release.
Boeing expects $110.5 billion in revenue and $20.00 a share in core earnings at the midpoint for 2019 with operating margins as high as 15%, 310 basis points higher than in 2018.
I’d call its outlook impressive. Wouldn’t you?
The Trade Dispute Is Not Slowing It Down
Although the final quarter of 2018 was not kind to Boeing stock as fears of a protracted trade war between China and the U.S. would hurt the company’s sales in the country, it appears those concerns, at least as it relates to Boeing, were wholly unfounded.
“I can tell you — having been intimately involved in the discussions and engagement with the governments both in the U.S. and China – we see progress on that front,” Muilenburg said of the trade negotiations. “We see convergence, and we also see that there’s clearly a mutual benefit to having a healthy aerospace industry for both the U.S. and China.”
The fact is, China needs Boeing as much or more than Boeing needs China. The country’s expected to add one billion new passengers between now and 2040. That means it requires a lot more planes. Despite all the estimates of China’s insatiable demand for aircraft — it accounts for 18% of the demand for new aircraft globally — those might actually be conservative providing Boeing with an even bigger cash cow than initially thought.
“China needs the airplanes for growth to fuel their economy and to meet their passenger growth and cargo growth needs,” Muilenburg said.
How do you meet an insatiable demand? You do. Boeing’s got a fabulous problem that any CEO would love to have.
The Defense Business Is Doing Okay
The supposed weak link in the Boeing chain is the company’s defense business. It had seen revenues drop from $32.1 billion in 2007 to $21.1 billion a decade later. However, the company dug deep in 2018, winning several lucrative contracts, and increasing revenues by 13% in the process to $23.2 billion. In 2019, Boeing expects the defense unit to grow sales by 14%, delivering a second consecutive year of growth for the embattled division.
Although these numbers are encouraging, the unit did see profits drop by 27% to $1.59 billion. As long as the commercial aircraft continues to push margins higher, shareholders will likely take the good with the bad.
In the long term, Boeing must address the defense business’s margins. Global Services, the company’s service business made a billion more than the defense business in 2018, on $6 billion less in sales.
It Has Enormous Free Cash Flow
Boeing’s ability to generate free cash flow is something that I was relishing earlier in 2018.
“In fiscal 2017, Boeing had $11.5 billion free cash flow, 85% of which was generated in the second through fourth quarters. If the same thing happens in 2018, Boeing should generate $18.3 billion in free cash flow,” I wrote April 25 evaluating Boeing’s Q1 2018 earnings. “Based on an enterprise value of $201.6 billion ($199.0 billion market cap, plus $12.5 billion debt, less $9.9 billion cash), Boeing has a forward FCF yield of 9.1%, which in my estimation puts it in value territory.”
OK, so my free cash flow estimate missed by several billion — Boeing generated 80% of its free cash flow in the final three quarters of 2018, not 85% — but it was still an impressive showing, upping FCF by $2 billion or 17% year over year.
As for FCF yield, it currently is 5.7% [Free Cash Flow of $13.6 billion divided by Enterprise Value of $237.3 billion (Market cap of $233.4 billion plus total debt of $13.9 billion less $10 billion in cash, cash equivalents, and short-term investments)], which is pretty good considering it’s gained 27% in five weeks.
Assuming it hits the low-end of its outlook for operating cash flow in 2019 of $17 billion and allocates $2.3 billion to capital expenditures, free cash flow in 2019 should increase by 8% to $14.7 billion, bringing its FCF yield above 6%.
Not bad for a tired old airplane manufacturer.
BA Stock Is a Big Momentum Play
What’s the old saying? A body in motion tends to stay in motion. That describes Boeing stock to a T.
Each week, Canada’s national newspaper, The Globe and Mail, produces an article about the week’s most oversold and overbought stocks on the Toronto Stock Exchange. As Scott Barlow explains, a stock is thought to be oversold when its relative strength index (RSI) signal drops below 30 and overbought when it climbs above 70.
For most of the past year, Boeing’s RSI has been in a range between 30 and 75, rising above 70 on two occasions (October 2018, February 2019) and below 30 on a single occasion (November 2018). On a momentum basis, the chart suggests that BA is overbought at this point.
I’ve tried to highlight some of the reasons why investors should own Boeing in 2019 and beyond. Perhaps it will drop below $400 in the next few weeks. At that point, it will lose the “overbought” status and become a momentum buy once more.
As I said earlier, Boeing is a potential $1,000 stock in the making.
It’s Investing in Supersonic Jets
Who can forget the Concorde? That marvel of technology that could get a person from London to New York in less than 3.5 hours.
Well, Boeing announced Feb. 5 that it had made a significant investment in Aerion, the Nevada-based developer of a supersonic business jet that’s estimated to cost $120 million a pop. To get the plane ready for service, Boeing is going to provide engineering, manufacturing and flight testing services. The AS2 jet will fly at 1,000 miles per hour, an increase of 70% over current business jets.
Also helping with the jet are General Electric (NYSE:GE) and Honeywell (NYSE:HON) who are responsible for the engines and cockpit respectively. Owned by Texas billionaire Robert Bass, consider this to be Boeing’s version of a moonshot.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
