Time to Bail on Boeing Stock? Definitely Not.
The analysts have dismissed Boeing Co (NYSE:BA) stock as being one of the worst performing companies on the Dow Jones. (Source: “Boeing Is Dow’s Worst Performing Stock in 2016 (NYSE: BA),” 24/7 Wall St, April 2, 2016.) It’s true that in the first quarter of 2016, Boeing stock has lost more than 12.0%; there is no arguing with the numbers. However, perspective always adds so much more constructive nuance.
Boeing stock hit an all-time record just about a year ago, when it touched the $153.00-per-share mark. Because of a U.S. Securities and Exchange Commission (SEC) investigation rumor over perceived errors in accounting practices and the layoff of 4,000 employees in Seattle, Boeing stock lost some lift starting in late 2015. It hit a low point of $108.00 last February 11. Since then, Boeing has delivered a steady climb. Today it is trading at the rather pleasant altitude of $129.00 and climbing.
Indeed, Boeing stock is heading back to its record price. The company recently secured two big contracts for a total value of well above $3.5 billion. The first contract, from the U.S. Department of Defense (DoD), is worth $275 million and it relates to research and develop technology that increases ground-based space capabilities. The second contract involves the confirmation of a $3.2-billion sale of eight “P-8” maritime patrol aircraft (based on the Boeing “737” platform) and associated support. (Source: “United Kingdom – P-8A Aircraft and Associated Support,” Defense Security Cooperation Agency, March 25, 2016.)
But this is only the beginning. Several governments are interested in the P-8. Boeing could get more related contracts from the Pentagon as well, given that the aircraft is the most advanced “spy-plane” in the world. (Source: “AF’s new ‘GCHQ in the sky’ spy planes that can hack enemy emails and phone calls,” The Mirror, April 2, 2016.) The contracts show that Boeing still has the potential to win big military contracts, an area in which it suffered a major blow when it lost the strategic bomber contract to Northrop Grumman last year.
However, this is just the surface of Boeing’s multibillion-dollar contract potential. Boeing’s main rival Airbus (OTC:EADSY) has cast a shadow over Boeing in the past few months. The European aerospace giant stole the limelight from Boeing by winning a multibillion-dollar deal to supply 120 airliners to Iran Air. Boeing could do little to compete. Airbus enjoyed full backing from the French government, which has a large stake in Airbus stock. Boeing, meanwhile, could not rely on the same kind of support, risking a breach of U.S. sanctions against Iran, many of which remain in place, the current state of détente achieved through the nuclear deal last year.
Yet it seems Boeing has managed to get clearance to pursue business in Iran. After all, Iran Air was a major Boeing customer. So much so that Boeing designed and built the “747 SP” especially for Iran Air, which was one of the world’s best airlines in the 1970s before the Islamic Revolution.
The time has come for Boeing to benefit from the lifting of economic sanctions against Iran. A Boeing delegation visited Tehran last weekend and discussed the sale of the 737, “777,” and “787.” That represents just about the bulk of Boeing’s product offerings. (Source: “Boeing Takes First Step Into Iran Months After Airbus Bonanza,” Bloomberg, April 11, 2016.)
This is a first step. Still, it is a major step. Iran Air has a history with Boeing and pilots are not an ideological bunch. They like to fly Boeings. I personally know a pilot, who started his career with Iran Air, and now flies for a major North American airline as a captain. This pilot compared flying a Boeing 737 to driving a Porsche. The Airbus has less intuitive controls: “You manage the Airbus while you fly the Boeing,” he said.
Of course, airlines consider far more grounded arguments for their fleet purchases, but Iran Air is still controlled by engineers and pilots rather than accountants and bill counters. For Boeing, it has gotten the necessary permission from U.S. authorities to establish contacts with Iranian airlines. The company will still need a special license to sell its devices, though. (Source: Ibid.)
Boeing’s visit to Tehran establishes some important considerations for investors. Boeing has a better understanding of the Iranian fleet now and can make related plans. It also has the crucial permission from the U.S. government, which would still need to approve any sale.
Iran has already ordered 200 aircraft in three aviation groups, the majority from Airbus but also Brazil’s Embraer and the French-Italian regional turboprop specialist ATR. But the Iranian Civil Aviation Authority, with the most populous country in the Middle East, wants 400 to 500 airliners over the next 10 years. There is plenty of room for Boeing to secure a contract no less impressive than Airbus’s $27.0-billion deal. Iran Air has about 140 aircraft in operation with an average age of about 20 years. In the U.S., most fleets have an average age of five to nine years. In Asia and the Gulf, average age is often less than five years.
Boeing stock has a target of $148.00, but this seems somewhat conservative, overly pessimistic even. Boeing stock might be heading higher than ever if it can secure an Iran Air deal. This is likely to happen during the current administration at the White House, which would be the most open to supporting Boeing’s business in Iran.
If you’re not bullish on Boeing stock, consider that the company’s main challenge is to fulfill its huge order book, a backlog of aircraft that will keep the company operating at full capacity for almost a decade!