Why We Were Expecting Boeing's "Upside Surprise"

Last week, after the engine problems with a Southwest Airlines Inc. jetliner put The Boeing Co. (NYSE: BA) back in the bearish crosshairs, we once again told folks to use the sell-off to "accumulate" shares of the aerospace giant.

It's a mantra we've reiterated over and over.

And today, we again see why.

Boeing has released first-quarter results that blew away expectations. More importantly, it boosted "forward guidance" for cash flow (CF) and profits, as the jetliner and defense heavyweight climbs toward another record year. The shares have surged more than 3% today and are now trading at roughly $340 - 448% above our initial "Buy" call at about $62 back in September 2011.

I think we're barely getting started...

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Boeing's Beat Was Very Convincing

"Our team's strong first-quarter performance, combined with the positive market outlook across our businesses and our confidence in executing on our production and development programs, gives us a solid foundation to raise our guidance for the year," CEO Dennis Muilenburg said in a statement.

First-quarter profits checked in at $3.64 - 68% above last year's earnings of $2.17, and well ahead of the forecasted $2.58.

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And thanks to what Boeing described as "strong performance across the company" (words that Wall Street loves to hear), revenue results also smoked expectations.

Revenue came in at $23.4 billion - up from last year's $22 billion and well above the projected $23.4 billion.

This is what's known as an "upside surprise" - and is the kind of unexpected gift that kicks professional investors and the sell-side analyst crowd into buying mode.

Especially against the ugly market backdrop we've seen of late - one exacerbated by both trade war fears and the expectation of higher interest rates - this kind of surprise is a major share price "trigger."

But as I know from the three decades I've spent covering public companies as a business journalist, investment columnist, and stock market guru, there's something that gets Wall Street even giddier than better-than-expected results.

I'm talking about "increased forward guidance."

That tough-to-navigate bit of stock-market jargon is a euphemism for a boosted forecast.

And in a bad market, a boosted forecast is like manna from heaven.

You see, stocks are financial "discounting mechanisms," meaning they take expected future results and translate them back into a current market value.

So while upside surprises are awesome, the fact is that these are history - are already in the past. So investors will put a much bigger premium on a company that says, in effect, "Hey, folks, even better times are coming."

Before these latest results, Boeing was forecasting core earnings per share in the range of $13.80 to $14 for the full year.

But the company just boosted its guidance range for the current year all the way to $14.30 to $14.50.

And that means Boeing will be throwing off more cash that can be used for stock buybacks and dividend increases.

Here's why that's critical.

This Stock Throws Off Cash Like It's Going Out of Style

In September 2011, when we first recommended Boeing, the stock was trading at $61.92 and was paying a dividend of $1.68 a year - a yield of about 2.7%.

Now the stock is trading at about $344 - a 448% gain.

My Private Briefing subscribers who followed along racked up $20.72 a share in payouts, taking the "total return" to 488%.


But get this...

...the dividend is now up to $6.84 a year. So the "yield on cost" (the current payout as a percentage of the $61.92 you originally paid for Boeing) is 11.05%.

That's right: You're getting an 11% yield on a blue-chip stock.

That's why the expected increase in cash flow will continue to be big.

And it's why we've repeatedly re-recommended Boeing - including in this "Stock Talks" video during the first quarter last year, when the shares were trading at about $170.

The stock has doubled since then.


If you acted on our recommendations, kudos to you.

But if you didn't - or if you're not a Private Briefing subscriber yet - don't fret.

You see, I look at Boeing for the long haul.

And that's the best part: Even after that huge run-up I just described, Boeing - the company - is probably in better shape now than it was at the time of that first recommendation.

Back then, concerns about the company's defense unit and the still-to-ship Boeing 787 Dreamliner made this a kind of contrarian call. But the Dreamliner is flying now, and Boeing has tightened up its defense operations in a manner that will let it capitalize on the expected surge in global defense spending. It's also moved into drones and unmanned aerial vehicles in a big, big way - creating another growth "trigger" going forward.

As for the commercial jetliner business: Long-term demand there is more promising than ever.

Back in 2011, when we first told folks to buy Boeing, the company was predicting that the world's airlines would need 33,500 commercial jets, worth roughly $4 trillion, in the two decades to follow.

Fast-forward seven years: Boeing's crystal ball is now forecasting demand for 41,030 jets over the next 20 years - worth roughly $6.1 trillion.

The ongoing surge in global travel - combined with the "New Arms Race" we've been chronicling for you here - means big things for Boeing. It's why I follow such new-paradigm tech/aerospace trends such as drones, unmanned aerial combat, hypersonic technology, and ballistic missile defenses in such detail. And why I will keep following them.

That all bodes well for Boeing. And - for investors with a long time horizon - it also bodes well for Boeing's stock.

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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 at Money Map Press.

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