Don't Be Fooled by the Media, Boeing is a Buy

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I was at work here at the office last Monday night when I heard about the Boeing 737 crash at New York's LaGuardia Airport. A nose wheel on the jetliner had apparently given way after a hard touchdown just after 5:30 p.m. (EDT), leading to a crash that injured about eight of the 150 folks on board

"Uh-oh," I thought to myself. "Here comes another feeding frenzy."

You're an exceptionally sharp group of folks, so you know what I'm getting at here.

In the last couple of weeks, we've had a fire in one of Boeing's new 787 Dreamliners while it was parked at a gate at Britain's Heathrow Airport. Then there was the early July crash of Asiana Flight 214, which involved a Boeing 777 aircraft.

This nose wheel debacle would seem to have created a "trifecta of tragedy" involving the maker of all three of these jetliners. And that's led to a real effort by some journalists in the mainstream media to weave this into a tapestry that underscores the "continuing woes" of The Boeing Co. (NYSE: BA).

Don't be fooled.

There's that old cautionary aphorism that warns how "appearances can be deceiving." In this case, I believe they are.

I don't want that deception to juke you out of an intriguing long-term investment opportunity. If anything, you should be looking for an opportunity to buy.

Trust me on this ... with Boeing, I know what I'm saying.

I recommended the airliner giant in late September 2011.

The stock did well - very well, in fact.

Then came the Dreamliner battery crisis in the first part of January.

I saw it as a buying opportunity.

Interestingly, I received a surprising amount of blowback on my call to buy into the weakness. Some said I was underestimating the severity of this problem, while others said I was making light of a safety issue (something this former journalist would never do ... trust me on that).

The bottom line, however, is that Boeing is up 72% since that initial recommendation (77% including dividends) and 43% since the Dreamliner crisis "buying opportunity" call and was trading on Friday in the neighborhood of $105.

And just last week the world's largest airplane maker reported second-quarter results that beat estimates - and followed up by boosting its full-year earnings forecast.

Boeing said it earned $1.67 a share (excluding pension expenses) in the second quarter - well above the $1.58 analysts had been looking for. The company had been forecasting full-year earnings of $6.10 to $6.30. But it increased that full-year projection from $6.20 to $6.40 thanks to faster-than-expected aircraft deliveries and lower 787 Dreamliner production costs.

And Wall Street is catching on - last week, a major Wall Street firm said Boeing is worth $125 a share.

Last Wednesday, citing a positive view of the defense/aerospace sector, Deutsche Bank AG (NYSE ADR: DB) analysts maintained a "Buy" rating on Boeing and boosted its target price to $125 a share.

"We like Boeing into the quarter on the back of better-than-expected second-quarter deliveries and [the] likelihood of a small uptick to guidance and continued progress on 787 production costs," said Deutsche Bank analyst Myles Walton.

As the earnings report show, Boeing is getting stronger - not weaker. And we're not just talking about the numbers themselves - but rather are looking at the inherent business improvements that Boeing is making to bring about those bottom-line gains.

Those improvements include:

  • Gains from an accelerated assembly rate for the 737, 777 and 787 - all thanks to a boom in global aviation (a topic we'll come back to).
  • Greater deliveries of higher-margin aircraft - such as the 737 and 777. In fact, the 169 airplanes delivered during the quarter marked Boeing's highest output level in nearly 15 years.
  • Cost reductions on the 787 Dreamliner program.
  • And some key international sales in the defense business - which have helped offset cost cuts in domestic defense programs brought about by sequestration and other budget reductions.

With a big company like Boeing, earnings aren't the only metric of success - you also have to look at revenue ... the so-called "top line." You see, big companies can elevate earnings with cost cutting - but only for a time. Eventually, you also have to have revenue growth.

Revenue, you see, is the "raw material" of profits. So when you see a company that's increasing revenue - and is then bringing that revenue to the bottom line in the form of higher earnings - you usually have yourself a pretty healthy company.

And that's what Boeing is doing.

Revenue rose 9% to reach $21.8 billion. And that was a full $1 billion more than analysts were expecting.

There are still concerns, of course.

In the conference call with analysts, Boeing CEO Jim McNerney said that sequestration remains a big concern - acknowledging that the company hasn't seen the worst impact of the federal cutbacks. In fact, the Boeing exec punctuated that point by saying that "we are not out of the woods at all. We are entering the woods."

Some might find such comments alarming. I find them encouraging.

McNerney also noted that Boeing is taking whatever steps are possible to get ready for sequestration's impact, and is being more than realistic about the potential effect. In fact, the scenarios that it's considering include the "most draconian" possible.

You have to like a corporate leader who believes in being prepared to that degree.

Especially when there's lots to be bullish about.

McNerney also noted that:

  • Global customer demand remains strong for Boeing's fuel-efficient and value-creating commercial airplanes.
  • Order activity remains vigorous: During the second quarter, Boeing booked 481 net orders - which increased the company's record commercial airplane backlog to nearly 4,800 airplanes worth $339 billion.
  • Deferral requests remain well below historical norms.
  • Requests for accelerated deliveries remain healthy.
  • Demand is fairly well-balanced from a geographical standpoint - hinting at a generally healthy airplane market.
  • There's backlog, too, between airplanes that will be used to support traffic growth and those that are needed to replace aging fleet aircraft.
  • Passenger trends are not only healthy - they've actually grown in recent months.

Boeing is a long-term holding because of the sheer size of the global commercial airplane market.

In an update report back in June, I said how the Chicago-based aerospace giant upgraded its 20-year global forecast for commercial airplane demand. Although this forecast is created by an industry participant (Boeing), this annual projection is nonetheless closely watched and is valued as an accurate assessment of the long-term health of the worldwide jetliner market. Boeing has been issuing that yearly projection for a long time, and it's viewed with considerable credibility.

In that mid-June report, Boeing said airlines, freight-carriers and airplane leasers will need 35,280 new jets worth $4.8 trillion as the world's fleet doubles over the next two decades. That forecast represents a 3.8% increase over the company's forecast from a year ago.

That may not seem like a big increase. But that much of a change in just one year - in a market as mature as this one - is significant.

Even more remarkable is the fact that the overall forecast increased that much - even with downward revisions in North America and Europe, where the continued overhang of the global credit crisis is threatening to create a "no-growth" recovery, or even a double-dip downturn.

It was this long-term growth potential that I had in mind when I told readers to "buy Boeing" during the battery crisis. And it's what I thought of again on Monday when I saw that many media outlets were trying to weave a "more bad news for Boeing" saga after the nose wheel mishap up in New York.

Unlike the battery crisis in January, the latest three mishaps are unrelated events that took place in three different types of aircraft. It's just not the same thing.

I like Boeing long term. And barring some unexpected new event, or a fundamental change in its business, that hasn't changed.

About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish… and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

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