Friday, June 17, 2011

As Boeing Boosts Sales Forecast, Should You Buy?

Boeing (NYSE: BA) boosted its long-term forecast of aircraft sales at the Paris Air Show. If Boeing's forecast is accurate, its sales should rise above previous expectations. Should you buy its stock?

The $68 billion (2010 sales) Boeing boosted its expectations for industry sales over the next 20 years by 8.5% on Thursday. Instead of the total of 30,900 industry wide aircraft it expected last July to be sold through 2030, it now expects that figure to total 33,500. Given price increases, those new orders will add $4 trillion to its sales -- 11% more than Boeing's July forecast of $3.6 trillion.

Boeing's brighter forecast reflects an optimistic view of global growth. Randy Tinseth, vice president for marketing at Boeing’s commercial airplanes division told the New York Times that growth would come from strong air travel demand now and positive long-term trends. As Tinseth said, “Not only is there a strong demand for air travel and new airplanes today, but the fundamental drivers of air travel — including economic growth, world trade and liberalization — all point to a healthy long-term demand.”

Boeing expects 3.3% average global GDP growth over the next 20 years with the fastest growth in China and India (up 7% a year each). Moreover, by 2030 Boeing forecasts 5% global air traffic growth with the fastest air traffic growth in the Asia-Pacific region (up 7% a year) and the slowest in North America -- up 2.3% annually). Moreover, Boeing expects passenger traffic to nearly triple while cargo traffic will more than triple by 2030.

This will translate into different levels of aircraft demand growth around the world, according to HeraldNet. Boeing expects 20 year demand growth by region as follows:
  • The Asia-Pacific 34%
  • Europe 23%
  • North America 22%
  • Latin America 8% 
  • Middle East 8%
Most of the new sales will come from smaller planes. Boeing expects 70% of the growth to be in sales of single-aisle planes like the 150-to-200-passenger Boeing 737 and Airbus A320. Twin-aisle wide bodies like Airbus’s planned A350-XWB and the Boeing 787 Dreamliner would account for another 22% of the growth.

Boeing's ability to capture that growth in twin-aisle demand will depend on its ability to deliver its oft-delayed 787 -- the 865-order, $139 billion backlog for the 250- to 330-seat aircraft -- about which I wrote in You Can't Order Change. (Boeing's stock has fallen 30% from its peak of $105 in Sept. 2007 when I signed that book contract.) Since the book's 1998 publication, Boeing has delayed the 787 seven times due to technical problems, a strike, and more generally the problems of too much outsourcing.

Boeing CEO Jim McNerney recently acknowledged these outsourcing mis-management problems about which I wrote in 2008. As he said at its annual investor conference, "What you end up realizing is, you need more cost to supervise outside factories outweighing the benefits of outsourcing design and manufacturing on the 787." In January, the 787's $12 billion cost was 120% over budget.

Boeing also faces problems in opening up a 787 production line in non-union South Carolina. Boeing set up the plant there because workers do not need to join a union in order to work in a plant in that state. This would give Boeing a place to continue making 787s if its unionized Washington-state plant workers went on strike. The House of Representatives is now taking up a National Labor Relations Board complaint against Boeing, according to AP.

While Boeing's future is the key to valuing its shares, its short-term performance also matters. And on that front, Boeing beat expectations and has maintained its guidance for lower than last years' earnings per share (EPS) in 2011. Boeing's first-quarter profit was $586 million, or 78 cents per share, 9% ahead of analysts' expectations according to Thomson Reuters I/B/E/S. Its revenues were down 2% to $14.9 billion, partly because it delivered fewer 777s than in the previous year.

Boeing stuck with its 2011 outlook of sales between $68 billion to $71 billion and EPS between $3.80 and $4. Those 2011 earnings would be below 2010's in which Boeing earned $4.45 per share on revenue of $64.3 billion.

Boeing is doing its part for shareholders. After all, it's producing positive EVA Momentum, up 2% -- with a great turnaround from 2009's EVA of negative $1 billion to 2010's EVA of $462 million and 2009 revenues of $64.3 billion. And Boeing's PEG of 0.56 makes it look under-valued -- its P/E is 16.3 on earnings expected to climb 29% to $5.33 in 2012. And the earnings forecast does not reflect Thursday's 8.5% boost to Boeing's 20 year industry revenue forecast.

With its 2.27% dividend yield, now would not be a bad time to think about adding Boeing to your portfolio.


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