This Could Send Boeing Stock Soaring
Boeing Co (NYSE:BA) has moved up and down like a passenger aboard one of the company’s planes during heavy turbulence. Indeed, some investors may already be heading for the sick bag in the pocket of the seat in front of them. Yet, for those with the ability to withstand pressure, Boeing stock will come out of the turbulence in one piece and stronger.
Nobody should buy Boeing for a short stint. This is a wide-body jumbo-sized stock where the benefits come gradually and steadily. Indeed, if Boeing has any issues now it is because of its huge backlog of orders. This raises questions about its ability to cope with orders. But while by business standards, this is a problem, it’s a much more desirable one than having no orders at all.
Boeing has a $480-billion backlog—just in its commercial division. Eight or nine years will pass before the company can fulfill all of its current orders. And unlike its main rival, Airbus, Boeing is also a major U.S. defense contractor with interests in commercial space exploration through its participation in United Launch Alliance (ULA) with Lockheed Martin.
Boeing’s defense sideline business is a hedge against the commercial aerospace’s tendency to be a cyclical business. Typically, this has meant following the course of economic growth as it climbs and descends. However, lately, both Boeing and Airbus have been forced to adapt to a different pattern. Economic growth has been mixed at best since the 2008 sub-prime crisis and subsequent crash, yet sales of airliners have soared.
Investors have become accustomed to the apparently endless stream of revenue as Boeing delivers more and more aircraft each year. Some investors may have asked how long Boeing can sustain this kind of growth and revenue stream. This concern is one of the reasons Boeing stock is down. However, the company is already trying to change the way it sustains growth at a more balanced pace, smoothing out the peaks and valleys, spreading the revenue more steadily.
Now, Boeing is faced with the difficulty of running a full assembly line of established airliner models for delivery while also launching production of a new model, the “777X.” The teething problems of developing the “787”—not to mention those of Airbus with the “380”—are costly. Boeing knows from experience that it has to modify its industrial and business model to function more efficiently.
Boeing has laid out a five-year strategy last week to boost revenue and earnings, while ensuring the company will last at least another 100 years. (Source: “Boeing plans to hike revenue and profit, aims to roll out 900 planes a year by 2020,” BNN, May 13, 2016.) The takeaway for investors is that Boeing wants to become more efficient. The gradual elimination of production problems at Boeing is one of the key aspects that investors should consider.
This is a good thing; it is the best thing Boeing can do in order to ensure the highest possible profits from its massive backlog. Boeing has clearly learned from its experience in adopting an entirely new supply chain model for the Boeing 787. (Source: “Airbus and Boeing contend with headwinds,” Financial Times, May 17, 2016.) The Boeing 787 suffered huge delays because of supply chain issues that ended up costing the company several billions of dollars.
After four years in official service around the world, Boeing has talked about the 787 program becoming profitable by the end of this year. But the 787 marked a revolution at Boeing and it was the first of a series of airliners built according to a new approach. The Boeing 777X will be the next test, but it already seems that Boeing is on a more profitable track on that one, a factor which will help lift Boeing stock in the long term. (Source: “Boeing Falls as Analyst Deems 787 Cost Recoup ‘Unachievable’,” Bloomberg, April 20, 2016.)