Chicago-based aircraft manufacturer Boeing Co. (ticker: BA) is coming off a disappointing appearance at last month’s Dubai Air Show, as Airbus Group (EADSF) scores a lion’s share of orders from the biennial event.
But for investors, never fear. Analysts say the future is bright for Boeing and BA stock, thanks to a monstrous backlog of orders, a lack of cancellations and a general consensus that Chinese growth will drive sales.
“Boeing has a seven-year backlog, they’re running full-rate production right now and they want to increase production rates later this decade,” says Kevin Michaels, the vice president of the aerospace practice at ICF International in Ann Arbor, Michigan. “Historically, manufacturers might have had a two-year backlog, so seven years is unprecedented.”
BA stock earnings. Boeing on Oct. 21 reported third-quarter revenue rose 9 percent to $26.8 billion and per-share earnings totaled $2.52 per unit, both easily topping estimates from Wall Street analysts. Shares have gained about 11 percent this year, and with such a large backlog of orders, it’s likely the stock has more upside, analysts say.
Analysts have a target price of $165 for Boeing stock, which represents an 11 percent increase over its current price. Of the 23 analysts who follow BA, 15 rate it as a “buy” or “strong buy” and six others rate it as a “hold.”
It’s not just the purchases already in-hand that make stock-watchers rate Boeing a popular buy — orders for new aircraft have been rolling in since Dubai ended, making some wonder if the lack of orders was a political ploy by some Middle Eastern countries as a backlash against American foreign policy.
Korean Air purchased 30 Boeing 737 Max aircraft and two 777-300ERs. EVA Airways, a Taiwanese airline, bought 18 787-10s and two 777-300ERs and aircraft leasing firm BOC Aviation purchased 22 737s. Companies that Boeing would not name have purchased five 737s and two 747s.
While Boeing’s future, at least in the near-term, looks bright, the company is still facing headwinds that could slow growth. Dubai was proof that while global air travel is growing, political backlashes can be fierce, says Brian Langenberg, a principle at Langenberg and Co. in Chicago.
Some Middle Eastern companies haven’t been enamored with U.S. policy with respect to the region, and they showed that at the air show, he says.
“Right now, it’s not like anybody in the Middle East is impressed with U.S. foreign policy,” he says. “These things matter. It’s not like there’s a lack of inherent demand or that people don’t like (Boeing’s) airplanes, but sometimes messages get sent.”
Still, after years of strong sales at Dubai, a slowdown in orders during the show was bound to happen sooner or later, Michaels says. And it wasn’t just Boeing — Airbus also had unusually scant sales at the event, although it came away with orders for 899 jets, compared to BA’s 526 orders.
Oil’s impact on sales. Low oil prices also may be partially to blame for the lack of sales, Michaels says.
As the price of oil declines — crude futures have dropped by almost half in the past year — fewer airlines are looking to scrap their older gas-guzzling aircraft for newer, more fuel-efficient models, he says.
Still, lower fuel costs could mean increased profits for airlines, which will likely reinvest at least some of that money into upgrading current aircraft or simply replacing older models that are run down. Few people like to see ashtrays in armrests, and customers want amenities such as television screens in seat backs.
American Airlines (AAL), for example, has said it’s flush with cash that it will spend on upgrading its aircraft and its fleet and pay down debt. Delta Air Lines (DAL), on the other hand, earlier this year began rewarding employees in the form of profit-sharing, boosting morale.
American stock is down almost 13 percent in the past year, while Delta shares have gained almost 3.5 percent.
Sales to U.S. companies are good, but it’ll be growth overseas — particularly emerging markets — that are expected to drive up profits, Boeing says.
Asia will be an area of growth, particularly China, Boeing spokeswoman Joanna Pickup says. Boeing ships one out of every four airplanes it builds to China, a trend the company expects will continue. China has averaged double-digit air passenger traffic growth, topping global trends.
“We expect Asia in general, and China (specifically), will continue to see above-trend economic and air-traffic growth over the next several years,” Pickup says. “We expect that China will continue to outpace the global average growth rate over the near term. As traffic grows in the region, so too will airplane deliveries.”
While growth in China is slowing, it’s still relatively robust. The country’s 6.9 percent growth rate is the slowest since 2009, but it’s still almost 7 percent, a pace envied by nations globally. Compare that to the U.S., whose growth rate is a scant 1.5 percent.
The outlook for BA stock. It’s that kind of growth that makes Boeing attractive going forward, Michaels says. That, and the seven-year, 5,600-aircraft backlog, which is “extraordinary by any standard,” he says.
“Boeing is working at a very high tempo and producing a record number of aircraft,” he says. “Long-term, the future is still very bright.”
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Why the Future Is so Bright for Boeing Stock originally appeared on usnews.com
