• Boeing has been one of the “Darlings of the Dow” for a long time
• The company has a lot of growth opportunities, both in the commercial plane space and the defense industry
• The stock price has almost doubled over the past year, and the company actively buys back shares and pays out strong dividends
• The space has several key players, but Boeing is continuing to gain ground on most of the competition
• Geopolitical tensions could weigh down the company’s performance over time

On February 19th, 1982, the Boeing 757 flew for the first time. 37 years later, on February 19th, 2019, the company’s 787 hit 801 MPH, supported by a jet stream that pushed it to record-breaking speeds, helping it to move faster than the speed of sound. For comparison, the ordinary cruising speed is 561 MPH.

Boeing always seems to be going full-throttle ahead, 250 MPH faster than everyone else. They have been a force to be reckoned with for a long time, both in terms of innovation and market performance. The stock returned 11.5% over a very dismal 2018 and has already returned 30.3% YTD for 2019. It has provided key support to the Dow Jones Industrial Average index, serving as both a market and industry leader.

Source: Charlie Bilello

The company operates in three business segments: Commercial Airplanes, Defense, Space & Security (DSS), and Global Services. Their Commercial Airplanes segment, 60% of their total company, grew at a year-over-year rate of 4.7% for December 2018. DSS grew 12.8% and Global Services 16.7%.

Source: Capital IQ

The company, and the industry, both have several opportunities for growth, in both the private and public sectors. The government has entered into several contracts with Boeing in particular, and the demand has increased among both domestic and foreign airlines for Boeing planes.

Overview of the Industry: Aerospace and Defense

The Aerospace and Defense industry is expected to experience strong growth in the coming years, as military expenditure increases and passenger travel demand grows. Backlog is at its peak, so manufacturers are expected to begin to push out product at a rapid pace, which will support higher revenues. However, the plans for increased production puts pressure on suppliers, and that could potentially limit substantial increases in production.

The Boeing 737 and Airbus A320 are two products that carry a large amount of backlog, so the production rates of these planes, in particular, are expected to increase substantially over the next year. There was a problem with the supply chain in 2018, in both engine and fuselage delivery, which resulted in delays in production. The delays are expected to diminish into 2019.

Source: S&P 500

The government provides significant support for these companies through the US defense budget, with a 10% increase in budgetary allowance for FY2018 and a proposed 3% increase in FY2019. There is a gap between approval and implementation, so the increased allocation will be spread out over the next several years, further fueling the DSS segment of Boeing’s company.

Source: Peterson Foundation

The US spends an extraordinary amount of money on national defense, more than China, Russia, Saudia Arabia, India, France, the UK, and Japan combined. For 2019, the budget is $686B, with a $597B base budget. This is good for Boeing, and other companies in the Aerospace and Defense industry, as the US government, utilizes the technology created by the manufacturers in the space. Boeing has already taken advantage of these relationships through contracts with the US Airforce, the US Navy, and NASA.

Defense, Space, & Security: Partnerships with the Government

Boeing secured a deal with the US Navy to build an autonomous Orca Extra Large Unmanned Undersea Vehicle (or XLUUV). The Echo Voyager vessel beat out Lockheed Martin’s craft for the deal, with both companies operating under a ~$40M contract to design the products. The vessel should provide a boost to Boeing’s Defense, Space, and Security business segment, especially if the Echo performs extraordinarily well in the space.

The US Air Force is also requesting product from Boeing, purchasing 8 new F-15 fighter bombs from the company. It will be proposed in the fiscal 2020 budget, but it is uncertain that it will get passed through, due to the Airforce already purchasing a large amount of F-35s from Lockheed Martin. However, Boeing said that they are “ready to provide a highly survivable advanced variant of F-15 to the Air Force at an affordable cost“, so the company is prepared to act if the deal does come to fruition.

The Air Force is already using Boeing for their T-X Training program, and Boeing also won out an $805M contract to build Stingray drones. There are also the whispers of a “space force”, which Boeing is apparently the top pick to lead. If the Space Force does become a reality, that would be an incredible growth opportunity for the company.

Boeing has also worked with NASA to develop the Space Launch System (SLS) Core Stage. The company bolted together three main components to the structure in January 2019 and plans to connect the rest of the stage later this year. The SLS is meant to be the “most powerful rocket ever built” going “beyond our moon and into deep space.” The first launch is expected to be in the last half of 2020.

Commercial Airplanes: Production Metrics

Outside of the defense space, the company announced that they are planning to increase the production of both their commercial 737 and 787 models, to 57 and 14 units, respectively. The manufacturer currently has a backlog of 5,900 jet orders, which is less than their rival Airbus, but still a hefty metric. Backlog can be used as a proxy for revenue growth, as the higher the backlog, the more “certain” the company’s future revenue-generating potential.

Source: Aviasale

The company delivered 806 jets over the course of 2018, surpassing 2017 metrics by 5.6%. The increase in deliveries allowed the company to beat on revenue by 14.3%, further fueling the stock to new highs. For 2019, the company expects to deliver ~900 planes, which will represent a 10.3% increase in revenues in best-case scenarios.

Source: Market Realist

The company’s production numbers have been growing for 11 years. The 737 is a huge leader for Boeing, representing 72% of its total shipments for the past year. For January 2019, 34 of the 46 jets delivered were 737s. The seven-year backlog of the company is still massive, and they expect demand of 43,000 airplanes over the next 20 years, or 2,150 planes a year. As long as they can keep the supply chain efficient, Boeing will have substantial plane production for the next several years.

Source: The Street

The New Plane on the Block: the 777x

Outside of the defense space, Boeing has been investing a lot of time and energy into their new product, the 777x. The wide-body plane is expected to serve as a substitute to Airbus A380, the current largest passenger plane, which Airbus announced that they would phase out by 2021.

Emirates will take the 777x on its first commercial flight in 2020, with the ability to carry over 400 passengers. The aircraft is also expected to be more fuel-efficient, and have a larger range in terms of flying distance.

Global Services: Examining Supply Chain Weakness

The supply chain has been a point of weakness for most companies in the aero manufacturing industry. An efficient chain is a huge component of the ability to successfully output product, and if one part doesn’t come through, then the whole plane is at risk. The below graphic details how delicate the supply chain is, and the extensiveness of the chain itself. There are over 20,000 parts on the 737 fuselage alone, to further highlight the very intricate manufacturing process.

Source: Brahman

Brexit and the trade war both pose a risk to the fluidness of the supply chain. If Britain does separate from the EU, that will affect a lot of European defense companies, and more than likely bleed into Boeing’s operations as well. There are also tariffs on aluminum, steel, and Chinese imports, and those costs could compound over time. Tariffs do impact Airbus more than Boeing, due to Boeing’s contract structures and built-in price escalators, which serves as a big competitive advantage for the latter.

Source: Scott Lincicome

Boeing does do a lot of overseas shipments, with the above chart detailing the 787 sales to various companies. All Nippon Airways, the largest airline in Japan, is a top customer. Boeing does have strong contracts with each respective customer, but trade tensions won’t do the company any favors in the long run.

Competition: Breaking Down the Jet Industry

One of Boeing’s top competitors is Airbus. The company had a terrible 2018, including production delays as well as executive turnover, but a stake in Canadian firm Bombardier’s CSeries jets enabled them to write production figures that were line-in-line with Boeing’s record year. They delivered 800 planes, a production record. Boeing delivered 806, 4 off of its 810 target.

Source: Seattle Times

 

Source: Seattle Times

The planes that Boeing delivered were valued at ~$60B versus Airbus’ $54B value. The 737 and the 787 were the most popular models for Boeing, with the A32oneo and A350 the most popular for Airbus. Boeing had 893 net new orders at the end of 2018, valued at $66B. They have almost 20% more unit orders and $14B more in value planned in 2019 as compared to Airbus.

Boeing has yet to announce the exact day they will reveal their mid-size aircraft, known as the 797. They plan to test market demand, and then roll out development in 2020, which could help boost their metrics even more.

However, Airbus has a plan for their planes too. The company is going to move production of the A220s to a new assembly line in Mobile, Alabama, with plans to hire 600 new employees there over the next year and a half.

Boeing is responding with a $4.2B acquisition of the commercial aircraft and services operations of Embraer, a Brazilian jetmaker. The deal is waiting approval from the Brazilian government. The unions in the US are concerned about the deal, with worries that production will shift from the Washington state factories to a manufacturing complex in North Charleston, South Carolina, and potentially to Brazil entirely.

Source: Avery

Boeing still has tremendous advantages over Airbus, with lighter planes, and higher fuel efficiency, as the above graph details. Their product line is also much larger, with six twin-engine planes and three quad engines. Airbus has three twin engines, and one quad engine, due to the phasing out of the A380.

The Financials: Cash on Cash

Boeing had strong net income for 2018, with a 10.3% increase from 2017 numbers. Airbus managed to increase their net income by 5.3%, and Lockheed Martin was close behind Boeing at 9.4%. Boeing is expected to increase net income by 10.29% for 2019, bolstered by a 9.87% increase in revenue.

Source: Capital IQ

Boeing has strong profit margins, which have been steadily growing since 2014. Their gross margin is ~6% higher than both LMT and AIR. They also have improved their Return on Assets and Return on Invested Capital numbers. They do struggle with liquidity metrics, with their current ratio at 1.08 vs. industry 1.25 and quick ratio at 0.28 vs. industry 0.80. Boeing is also a little bit more expensively traded as compared to LMT and AIR, trading at a 17.1x TEV / EBITDA versus LMT’s 11.8x and AIR’s 13.8x.

They also have been buying back a significant number of shares. Their net change in cash was negative for 2018, with outlays towards repurchasing stock and repaying a significant amount of debt. Their cash from operations was up 14.8%, which is promising. Their free cash flow increased 2.6%.

The company has a lot of plans for their cash, with the $4.2B acquisition + $4.5B in dividends and a new $20B share repurchase program, on top of the halfway completed $18B program. Assuming the company repurchases $10B worth of shares and completes both the acquisition and the dividend program, that’s an $18.5B cash usage. The company can handle the outlay, but they will more than likely have to issue debt to complete all their goals. However, I think that taking out debt to appease shareholders and support a growth opportunity is not necessarily a bad decision.

Source: Capital IQ

Looking at the Financials: Strong Focus on Shareholders

Boeing operates with the shareholder in mind. They increase their dividend once a year and have paid a dividend consistently over the past 80 years. After the Recession, the dividend remained at $1.68 until the company bumped it to $1.76 in 2012. Since then, the annual dividend has increased at a CAGR of 25.38%, to its current value of $6.84. The company’s payout ratio has decreased over the past two years, falling from a peak of 54.7% in 2016 to the current ratio of 37.7%.

Source: Capital IQ

Lockheed Martin, for comparison, carries a dividend yield of 2.9%, the highest of all the airplane manufacturers, and a payout ratio of 46.6%. In this situation, Boeing is number two in terms of sharing wealth with investors, but reducing the payout ratio to retain more earnings to fuel growth is a good step for Boeing to take. They have been more than generous over the past seven years, and reducing the payout ratio to focus on innovation is an important step right now in the company timeline.

Source: Geert Wellens

There is concern that all of this payout to shareholders has dried the company’s pension plan out, which is currently 79.6% underfunded, according to the above graphic. The company has strong enough cash flow as to where this shouldn’t be a massive problem, but with more than 1,700 employees on track to reach retirement in the next five years, it is something the company should consider. They actually brought retired workers back on the job at the end of 2018 to try and balance out delays in 737 production.

Turning Parabolic: Looking at Boeing’s Stock Price

Source: Rudolf Havenstein

Boeing is an expensive stock. It currently trades ~$420 per share, which is 43.8% higher than it’s 52-week low of $292.47. The price chart is parabolic, which isn’t a great sign. There are talks of a stock split in the company’s future, as they haven’t split since 1997. It also represents 10.9% of the Dow, which means that what Boeing does throughout the trading day really impacts the movement of the index.

Source: Capital IQ