Take the Long View on Boeing Stock
Boeing Co (NYSE:BA) has suffered this year. Boeing stock has dropped 9.06% amid some production restructuring and slower-than-expected orders. Yet Boeing, like its main rival, Airbus SAS, is facing a limbo situation. Neither one of the two aerospace giants have reached their annual growth targets. Boeing is also feeling the rise of new competition in the small mid-range jetliner category, from Bombardier, Inc. (TSE:BBD.B).
Boeing has disclosed that it may fail to achieve its sales target of about 740 aircraft this year. These indications have been apparent for some time, but Boeing has made it official. Thus, the company has put pressure on Boeing stock. Better now than later; as in before the next earnings call, which is happening on October 19. Disclosing the disappointing results now also allows Boeing to deliver an earnings surprise.
So far, Boeing has received orders for 355 new planes since the beginning of the year. Speaking at a conference with investors organized by Morgan Stanley (NYSE:MS), Boeing’s CEO was cautious about its forecast revenue for 2017. He called it “flattish,” according to Reuters. (Source: “Boeing CEO sees ‘flattish’ sales, profit rise in 2017,” Reuters, September 14, 2016.)
In late July, the group confirmed that revenue for 2016 would fall between $93.0 billion and $95.0 billion. As for the all-important earnings per share, there may yet be some bullish potential. The Boeing “777” appears to be the problem. The airplane is due for an upgrade, to the “777X,” and Boeing has mulled cutting production of its 777. Since the beginning of 2016, in fact, Boeing received eight orders for the aircraft against a target of 40.
Here’s the Good News on Boeing
The good news is that Boeing had expected the 777 lull. That’s why it designed the 777X, which will go into production imminently. This version benefits from a longer fuselage and new engines, which increases range and improves fuel consumption. The main point, however, is that in the longer term, BA stock still makes sense.
The revised revenues and production schedule is much more of an issue of a production shift than a slowdown in the overall global demand for airliners. The Middle East and the Asia-Pacific regions remain as hungry as ever for new planes. It’s simply a matter of organizing the transition from one plane model to another and customers being reluctant to buy the old model, when they can delay their orders a while and secure a new and improved offering.
The downside is that the Boeing 777 has proven to be highly profitable for Boeing, so reducing its numbers could affect earnings. But, there are also the Boeing “737 MAX”—another variant of a popular plane needing a bit of transition time—and the “787,” whose production should rise from 12 to 14 units a month by 2020.
So, while there are hiccups in the short term, the long-term picture for Boeing remains bullish. And so it should be, given that it has a backlog of $417.0 billion. This will keep the factories humming at full thrust for a decade or so. Boeing also predicts that China alone will order planes to the tune of $1.03 trillion over the next 20 years (Source: “Boeing: China Aircraft Demand to Rise, Market to Cross $1T”, NASDAQ, September 14, 2016.)
The Trick to Boeing Stock Is Patience
Investing in Boeing requires some patience, but while BA stock is suffering a little now, the long-term view is bullish indeed. Boeing is not some fly-by-night operator. If one were to base a company’s value by its potential to survive, then Boeing would occupy one of the top spots. As an aerospace company, it both benefits and develops cutting-edge technology. Moreover, apart from the huge airliner backlog and overall market demand, there is also the matter of Boeing’s defense contracts.
Boeing may have lost visibility in the defense space, because the U.S. and other air forces worldwide have rationalized their fleets. Now a single plane can perform more tasks, while drones have changed the game of aerial warfare. Northrop Grumman Corporation (NYSE:NOC) has secured the last major new military aerospace contract for the strategic nuclear bomber.
Boeing has a lucrative, if morbid, revenue base in the business of nuclear-tipped missiles. Boeing has the contract to redesign, build and maintain America’s intercontinental ballistic nuclear missile (ICBM) arsenal. That’s a tall order, and one that nobody ever hopes to use. The day such a product is used will not be a bullish one for the markets, but the risk of thermonuclear war is a boon for BA stock.
But geopolitical tensions with either a Donald Trump or Hillary Clinton administration will keep the Boeing military production lines humming. Low fuel costs, for that matter, will be greasing demand for new planes in the commercial sphere.