You can be forgiven for feeling conflicted over The Boeing Company (NYSE: BA) and its stock.
On the one hand, the company has been hit by a lot of widely reported problems with its 787 Dreamliner commercial aircraft.
On the other hand, Boeing stock is up 78% this year. See the contradiction?
OK, let's sort this out.
First, the bad news. In January Boeing made headlines with reports of potential battery fires in its new flagship Dreamliner model. Other stories at the time focused on such problems as fuel leaks and a cracked windshield.
A few months later, many analysts worried about the impact of the government's sequestration-forced budget cuts on Boeing's defense-related business, and that longer-term defense budget cuts also could hurt the company.
Today, the Deamliner's engines may have an increased potential for icing, which has the Federal Aviation Administration concerned that corrections need to be made.
And yet Boeing just delivered a very impressive earnings report. Company revenue increased 11% to $22.1 billion year over year. And thanks to a 14% increase in aircraft deliveries, core earnings (excluding some pension and other costs) jumped 16%, from $1.55 a share last year to $1.80 - handily beating Wall Street expectations.
When you dig into what's really going on at this $97 billion mega-company, you will see that those numbers are just a small taste of a very bright future. The problems that got so much attention earlier this year only served to obscure a business on track to ramp up profits for years to come.
Boeing (NYSE: BA) - A Tale of Two Companies
One of the keys to understanding Boeing is that in some ways it's two different companies.
The commercial aircraft segment accounts for nearly two-thirds of its sales, with its only competition being Europe's Airbus S.A.S.
Meanwhile, Boeing's defense segment is the second-largest defense contractor for the U.S. government, just behind Lockheed Martin Corp. (NYSE: LMT).
Each segment has potential to contribute to the bottom line, though for now one is doing most of the heavy lifting.
First there's Boeing's Defense, Space and Security. Considering the gloom-and-doom talk about defense cuts and sequestration, this business segment hasn't done all that badly. It posted revenue of $8 billion for the current quarter, up 3% year over year. But earnings for the quarter dropped 19% to $673 million.
But looking ahead, Boeing's defense segment has some projects in the pipeline that could turn it into a major moneymaker...
The project with the most potential is a long-range bomber it's working on as a partner with long-time rival Lockheed Martin. Rather than bid on the project individually, Boeing and Lockheed decided to join forces in their attempt to surpass the bid by rival Northrop Grumman Corp. (NYSE: NOC), which is currently the contractor for the B-2 stealth bomber.
If they win out over Northrop, the partnership could pay off very handsomely, as a new long-range bomber program - said to be a top priority for the U.S. Air Force - is estimated to be worth $55 billion.
The Dreamliner: Boeing's Cash Cow
But even if Boeing doesn't win the long-range bomber contract, it already has a bird in hand - the Dreamliner 787.
Yes, despite all the negative media attention, airlines can't order enough of the Dreamliner. The reason is that the Dreamliner vastly reduces fuel costs as well as maintenance costs.
Demand is so strong, in fact, that Boeing is ramping up production of the aircraft. Boeing says it will increase plane production from the current 10 per month to 12 per month by 2015 and plans a further increase to 14 per month by 2020.
The company presently has orders on the books for 890 of these planes. To fill those orders would take more than five years - even at a pace of 14 planes per year.
Just as encouraging is that Boeing's wide-body airplanes are also in high demand. Boeing's 777 and the updated 777X (soon to debut) - which has twin-aisles and can seat up to 400 for long hauls - has seen a 30% increase in deliveries from the previous year.
Demand will increase even further as Emirates, an up-and-coming airline based in Dubai, is in negotiations with Boeing for the purchase of more than 100 of the fuel-efficient 777X models. These discussions alone have the potential to generate contracts worth more than $30 billion.
Demand is most pronounced in Asia, Latin America, and the Middle East, while in the United States and Europe there remains a steady need for newer, cost-effective planes to replace older fleets populated by models like the fuel-thirsty 747.
In particular, Boeing has high hopes for China and expects it to overtake the United States in the next 20 years as the world's largest airplane market. The company already has a number of contracts in place with Chinese airline operators and recently secured commitments for an additional $20 billion.
By the end of this year, Boeing expects to deliver a record-setting 635 to 645 aircraft (60 of which will be 787 Dreamliners)
Altogether, accounting for all the different model types in its commercial division, Boeing has 4,800 planes on backlog. This giant backlog of orders - valued at $345 billion - represents a powerful safety net in case further military cutbacks ding revenues in Boeing's defense segment.
More to Like About Boeing Stock
Here's something else that appeals to me: Management has been very friendly to shareholders recently. The company bought back 7.6 million shares at a cost of $0.8 billion in the most recent quarter and paid out $400 million in dividends.
It's no wonder Boeing stock currently sits near all-time highs. In my view, the company clearly outclasses its peers, such as Airbus on the commercial side and Northrop on the defense side. But it appears this knowledge is already baked into the cake, and the Boeing stock price reflects that.
So I would BUY Boeing, but in two parts. Buy some now and wait for a pullback in share price (perhaps due to a needed market correction) for the balance. Either way, you don't want to miss this flight.
About the Author: David Mamos brings nearly 15 years of analytical experience to the table, with a background ranging from big-picture fundamental analysis to highly technical trading decisions. He began his career working as a financial advisor with Royal Alliance in 2001 and helped clients with portfolio management as well as buy-sell decisions before transitioning to the development, implementation, and execution of trading strategies for aggressive investors.
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