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Boeing’s (NYSE:BA) latest quarterly earnings are out and they beat on both earnings and revenues. Earnings per share came in at $1.27, topping consensus estimates of $1.11 and revenues saw about a 21% increase year over year, coming in at $20.0 Billion versus estimates of around $19.4 Billion.
As you know, this earnings season it’s all about revenues so is Boeing’s beat here a sign of more good things to come despite a widening wall of economic worry? Is Boeing right now a BUY, a WAIT and SEE, or a STAY AWAY?
Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.
C = Catalyst for a Stock’s Movement
Boeing’s arch rival in the air wars – European manufacturer Airbus — has been beating Boeing like a drum for the past four years since Boeing set the record for aircraft orders in 2007 at 1,417. Fast forward to 2011and Airbus eclipsed that record with total net orders of 1,419 versus 805 for Boeing. Airbus topped Boeing in aircraft deliveries as well, 534 versus 477. In short, Airbus has sent Boeing to the woodshed.
Analysts expect that to change in 2012, which should result in a slow-moving catalyst as opposed to a dramatic one-time event. The first evidence to support that claim came with the Associated Press reporting that at the recent Farnborough Airshow Boeing logged potential deals more than doubling what Airbus booked during the same show. Watch for this trend to continue as the 787 Dreamliner picks up the order pace while the competitive offering from Airbus – the A350 – is suffering from its own production delays.
H = High Quality Pipeline
Boeing has no immediate plans for a new blockbuster aircraft like the 787 Dreamliner, but there are new versions of Boeing’s leading series of planes, including an enhanced 787-10 and the 737Maxx and the 777X. If all goes according to Boeing’s plan the 777 series will be the most fuel efficient wide-bodied aircrafts in the sky. They have three different configurations in the works they expect to enter into service in 2019
No one in their right mind expects the price of oil to remain this low forever and the airline industry as a whole is in need of updating its gas-guzzlers – enter the Boeing 737 MAX series, with a reported 19% reduction in fuel cost over the competition. In December 2011 Southwest’ Airlines ordered 150 of this new version, which is still on the drawing boards!
E = Equity to Debt Ratio is Close to Zero
Boeing (NYSE:BA) is in a capital intensive industry so it is no surprise their debt to equity ratio is less than stellar. Right now it sits at a lofty 2.31, or 231%. However, they reduced total long term debt from $10,324 Billion a year ago to $8,735 Billion this quarter. Factor in short term debt and you get $11.2 Billion total debt, but they have $10.25 Billion cash on hand.
A = A Level Management Runs the Company
It is a rare corporation that looks within when something like a new product launch goes awry. To say that the introduction of the 787 Dreamliner has had its share of trouble would be a vast understatement. In February of 2012 Boeing top management stepped in and made a change in leadership of the Dreamliner operation by swapping the head of the successful 777 series into the top position with the 787, with the former head of the Dreamliner operation going to the 777.
E = Earnings are Increasing Quarter over Quarter
Boeing’s Earnings per Share slipped from $1.84 for 2011 Q4 to $1.22 for 2012 Q1, but returned to an increase between the second and third quarters. Their five year EPS growth rate is an impressive 13.4%.
T = Trends Support the Industry in which the Company Operates
Despite the mountain of macroeconomic concerns, globalization and the rise of emerging market countries is pushing up demand for airline travel. Industrialization in countries like India and China has made air travel possible for literally hundreds of millions of people. Fuel costs are always a concern, but that bodes well for aircraft manufactures as carriers are looking for more fuel efficient fleets.
Boeing’s aircraft operations have a tendency to suck all the air out of the room, leaving some unwary investors to overlook the fact they derive about 48% of their revenue from their defense, space, and security operations. Looming on the horizon is the “fiscal cliff” at the beginning of 2013 when unspecified cuts totaling around $600 Billion in US defense spending are supposed to become a reality.
Perhaps because they are broadly diversified across the categories of defense spending, the analyst community doesn’t seem too concerned. Thompson/First Call data shows only 1 analyst with an UNDERPERFORM rating, with a whopping 26 analysts at BUY or STRONG BUY. Another contrarian bit of evidence is Saudi Arabia’s $29.4 Billion order for Boeing’s new F-15 fighters, with deliveries to commence in 2015. In short, the US may be the biggest defense spender, but we are not the only country shopping for the latest military hardware.
Overall, Boeing right now seems like a clear BUY for those who feel either that the fiscal cliff will be avoided, or that the impact on Boeing may be manageable.
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