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Farnborough Air Show: Boeing gets its Game Face on

Jul 12,2014  INVESTMENT IDEAS  Comment: 0

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New York City, New York – (StockNewsDesk) – 07/12/2014 —  According to Boeing (BA), the world will need 36,770 new planes worth $5.2 trillion by 2033. The company currently makes up 65% of all the current jet-liner orders with its 787 and 777X airplanes. Furthermore, it also increased its demand from China and expects the country to require 5,580 new planes through till 2032, with a monetary value of $780 million.

The new forecast represents a 4.2% increase in demand compared to the company’s previous estimates. The airplane manufacturing industry is one which has outperformed Standards and Poor’s 500 index and Dow Jones Industrial Average over the course of the past five years. Boeing and Airbus are two investment opportunities which are unparalleled due to the low risk and continued international growth.

BA

Financial Standing

Boeing’s revenue took a beating in 2008 and 2010 amidst dwindling global demand and recession. Barring these two years, the company has shown an incremental growth on a year over year basis. At the 2012 Farnborough Air Show, Boeing stole the show with its Qatar Airways liveried 787 – a new airplane which revolutionized aircraft construction and travel. As a result, the company surged ahead of Airbus after ironing out multiple production problems as is reflected by the 18.86% year over year growth in revenue. Fast forward to 2014, the introduction of airline oriented 777X is expected to create a similarly favorable conditions for the American airplane manufacturer.

Year-over-Year 2004-12 2005-12 2006-12 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12
Revenue 3.91 4.55 12.19 7.89 -8.25 12.1 -5.82 6.89 18.86 6.03
Net Income 160.72 37.39 -13.88 83.93 -34.41 -50.9 152.06 21.5 -2.94 17.56
EPS 158.43 39.13 -10.94 85.26 -30.49 -49.86 141.85 20 -4.31
Payout Ratio

34.4

31.4

42.3

26.6

43.8

89.8

37.7

31.5

34.4

32.6

On the Net Income front, Boeing suffered in the late 2000s due to heavy investment in the carbon composite airplane which it debuted in 2012. The initial hype led to a heavy consignment of orders in 2010 which also delayed the delivery time of the new airplane. The raft of orders justifies the 152% net income increase in 2010 and consequent 2011 growth as well. Come 2012, and the cycle of growth has tipped downwards. However, with the launch of 787-9 just days from now, it’s compelling to believe that the negative cycle will be reversed to capitalize on global demand for the larger 787-9. Furthermore, Boeing has kept a consistent payout ratio without being stretched to ship most of the earnings out to the shareholders. This is another reason why I have faith and remained assured of Boeing’s capability to reward investors in the long term.

Indicator

Boeing

Airbus

Market Cap $92.9 billion $50.1 billion
Price/Earnings TTM 21.8 21.8
PEG Ratio 16.0 0.1
Net Income Growth (3 Yr Avg.) 11.5 36.8
Net Margin% TTM 5.0 2.8
Dividend Yield, % 1.92 1.24
Return on Equity 40.4 16.1
Current Price $127.18 $16.02

 

On the valuation front, Boeing and Airbus stay true to their reputation of being two strongly contested rivals. As P/E is equal, PEG ratio portrays a vastly different picture by suggesting Boeing to be overvalued and Airbus – highly undervalued based on its incumbent growth. But the PEG ratio fails to take into account expectations and new product rollouts and the imminent order booking at Farnborough Air Show. Furthermore, Boeing’s high ROE and Net Margin are expected to grow after a successful showing at the Farnborough Air Show.

One could argue that Airbus could have an equally impressive outing at the Air Show, but equivocal news about the premiering of its new 330neo jet continues to dampen expectations about the company’s arsenal heading into the air show.

Timing

They say that the secret to being a successful comedian and investor lies in the same shell – timing. Timing is everything and currently Boeing is lingering towards the bottom of its 30 day range. With major announcements, displays and deals worth billions to be signed in the coming week, I gauge the current price of $127.18 to be an optimal break in point for to ride the curve from a short and long term perspective.

The optimism for Boeing’s imminent rise is fuelled by the positive response given to 787-9 as it was delivered to Air New Zealand. Furthermore, the $56 billion 777X orders finalized by Emirates is a major boost heading into the Air Show where airlines will be taking out their wallets once again. The move is further accentuated by Emirates’ willingness and option to buy 50 more of the aircrafts at a later date.

Furthermore, Boeing will allow prospective clients to pay for the airplanes in Euros in order to ease terms of business. On the Asian front, Boeing won its biggest order from a Chinese airline as it agreed to buy 80 737 jets valued at $7.4 billion. It’s interesting to note that while the companies pushes ahead with 787 and 777X marketing and sales, a large proportion of its sales are still accounted by the dated 737 aircrafts. The company seems to realize the business value of these smaller aircrafts and is thinking along the lines of producing a successor for the 757 which is also smaller in size compared to its 787 and 777X colleagues.

Verdict

At a time when Airbus’ uncertainty around its 330neo and complex issues of production and strategy continue to provide mixed signals to investors, Boeing is making the most its current product line and new products to maximize orders. This is further underlined by the billions reeled in before the air show has even begun while its primary competitor ponders over a certain decision to halt or slow development of its newer but poor-selling A350-800.

With an imminent deal with NASA to finalize a $2.8 billion control for the development of avionics systems, even sky is not the limit for Boeing. I believe it will be profitable for short and long term investors to buy into Boeing right now.

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