Boeing Company (BA) is the ultimate New Normal company and stock. Remember, the New Normal is characterized by slow to negative growth in the US and Europe, reduced government spending in both regions and much more robust growth in emerging economies. (See my article on the New Frugal Stock).
You all know Boeing, have sat in the company’s planes, watched their Dreamliner be late, be late again and be late yet again, and again. It is late no longer. That is at the core of the company’s fundamentals – a new product that will generate real world, positive cash flow immediately and positive cash flow and profits in several quarters.
The backlog is 495 units and the company has publicly committed to keeping it at that size – putting a new order in once a plane comes off the line. This stabilizes costs.
Wall Street knows this – but it is also afraid of the impact of a failure of the Super Committee on defense spending including the funds that flow towards Boeing. That worry is overblown.
And Wall Street is ignoring the potential upside impact of two revamped versions of the company workhorse, the 737. Well, not ignore – undervalue is a better term. The company announced today a deal to sell more than 200 of these planes to Lion Air of Indonesia, worth more than $20 billion. They will sell thousands, not hundreds of these plans, to emerging airlines and economies in Asia, Latin and South America and Africa.
Do you want to play New Normal emerging markets?
Boeing is one way to do so. They have competitors in this market – Airbus, now struggling a bit as their offerings are not as competitive as Boeing’s except due to state subsidies that may erode with the euro crisis and Embraer-Empresa Brasileira De Aeronautica (ERJ), a Brazilian outfit that announced last week they are not going after that market after all, finding it too expensive to develop a new plane to compete.
About Airbus – they are the only real competitor to Boeing in the Dreamliner and the 737 market – no insult to Bombardier (BDRBF), I like your planes, was just on one, but you need more overhead space in the next generation. And they are directly and indirectly subsidized by European governments. And these subsidies, at their very best, will not grow and in reality will probably be reduced due to the euro crisis and the austerity packages being put in place everywhere. This gives Boeing more opportunities to sell – and sell profitably – more airplanes.
About defense spending – fears are overblown. Boeing has less exposure to the big weapons programs that will be hit the hardest, such as the F-35 made by Lockheed Martin (LMT). Last week Boeing’s CEO said the company’s cost structure is being revamped on the assumption the Pentagon is asked to cut a trillion bucks over the next ten year and I believe him.
Risks? To the company, few other than a worldwide Great Recession. I believe there will be a regular recession in the US and Europe. To the stock, the market – Boeing will trade with movements of the S&P 500 for extended periods of time.
A general downturn will push the stock down. The stock has been flirting around $65, this is a good entry point but take your time. I expect the stock to double in five years or so and if you sell calls and re-invest the cash plus Boeing’s dividends that doubling in value will happen a lot faster.
Conclusions: Boeing is not going to double sales in a year – it is a medium growth company with a medium sized dividend (2.5%). But it is facing excellent growth for an industrial company because its new products save money. And that is the key – airlines and airplane leasing companies can borrow at very low costs and are locking in capital commitments while rates are low.
Why? These new products save a lot of fuel per passenger mile. This gives them a once in a generation opportunity to access cheap capital – their balance sheet – to significantly reduce operating costs-their income statement.
Bottom line: I believe Wall Street is way too cautious about growth for the Dreamliner and the 737 product line. It is far too pessimistic about defense cuts. It’s time to build a new normal position in Boeing.
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