This Company's Stock Will Rise as High as its Products

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Designing groundbreaking jetliners, military aircraft, satellites, missile defenses, and launch systems, Boeing (NYSE: BA) is America's leader in aerospace technology. If it flies through the air, Boeing can make it. This innovator employs 172,000 U.S. workers and consistently works to expand its global market and improve efficiency.  But being an innovator doesn't come without its risks. 

787 problems...

During the first year of service, the Boeing 787 Dreamliner experienced at least four electrical problems that stemmed from its lithium ion batteries. After incidents on All Nippon Airways and Japan Airlines planes, the Federal Aviation Administrations ordered a review of the 787’s designs.

During the period of review, hundreds of Boeing experts worked with U.S. and Japanese authorities to identify the cause of the battery failures and to create a solution. The solution included adding several layers of protection around the battery to prevent and isolate potential faults, along with a new enclosure designed to keep any battery problems from affecting the airplane.

Since then, the airplane has been cleared to resume flight as scheduled. With improved economics, fuel efficiency, lower noise and emissions, and top tier passenger comfort, the 787 is once again the most technically impressive commercial plane in the sky.

As a result of the 787 problems, Boeing was not able to execute share repurchases as planned for the first quarter of 2013. This will be remedied throughout the rest of 2013. Also, the fewer 787 deliveries actually helped increase operating margins for commercial planes to 11.4% by lowering margin dilution. Currently, production of the 787 is at 7 per month and is expected to grow to 10 per month by the end of 2013.

...but earnings ain't one

Despite the negative effects of the 787, Boeing managed to increase earnings per share by 24% to $1.73 in the first quarter of 2013. The company experienced a slight revenue decrease of 2.50% that it remedied by focusing on productivity and efficiency. An example of this is Boeing’s consolidation of its North American flight training operation into the existing Miami facility. The company is also reducing infrastructure on the 787 as it captures efficiencies and production stabilizes.

Currently, Boeing has a backlog of over 4,400 commercial planes worth $392 billion. The line for a 787 is so long that if you placed an order today, you wouldn’t receive the plane until 2019. Customer reorders of commercial planes are healthy with the exception of the 747 cargo market. Boeing plans to reduce production of the 747 from 2 per month to 1.75 per month in 2014 to deal with the softening market. Boeing’s strategy for the future of its commercial aircrafts is to balance the production schedule with strong demand to minimize long term volatility and maximize productivity and profitability.

Boeing’s defense, space, and security sector relies on government spending. So far this year, Congress and the administration have been acting to avoid across the board budget sequestration cuts by allowing the defense department to selectively allocate spending and approve multi-year contracts. Boeing believes this flexibility is an advantage for the company’s portfolio of proven and affordable systems. The international defense market also improved 42% last quarter and represents 28% of Boeing’s revenue.

Aerospace growth in emerging markets such as China and India is in the double digits bringing the global growth rate to 5%. These emerging markets are using air travel to grow their country’s infrastructure and represents about half of Boeing’s backlog.

A defensive competitor

One of Boeing’s biggest competitors is the security and aerospace company Lockheed Martin (NYSE: LMT). The company specializes in technology systems and products for defense, civil, and commercial uses that include fighter jets, missiles, and new coastal warships.

The company’s first-quarter earnings report was good with a 14% rise in net profit to $761 million and a 14.8% rise in earnings per share to $2.33. The company recently landed a $57 million contract with the U.S. Navy to upgrade the fleet’s electronic warfare defenses against anti-ship missile threats. It expects orders of up to 71 F-35 fighter jets from the U.S. and other foreign governments in the near future.

When compared to Boeing, Lockheed seems to have slower growth with a PEG of 1.65 against Boeing’s 1.15. Lockheed also relies heavily on the government’s defense budget. The U.S. Department of Defense has been required to reduce spending by nearly $1 trillion over 9 years including $487 billion from the Budget Control Act of 2011 and $500 billion from the sequestration that began March of 2013.

Because Boeing has an already successful commercial business, the company can be more flexible with budget cuts than its competitor. Lockheed has an attractive dividend yield of 4.20% compared to Boeings 1.90%, but I still think Boeing is a better investment due to the demand of its products.

Conclusion

Boeing CEO James McNerney recently said, “[In the aerospace industry] Boeing is going to be the winner. Don’t bet against us.” I’m inclined to take his advice. Boeing handled the problems with the 787 well and continues innovation to improve air travel. With its massive backlog, good dividend, international growth potential, and the high demand for its products, I think the company is a definite buy. In the coming years, this stock to go as high as the planes Boeing sells.


Ben Popkin has no position in any stocks mentioned. The Motley Fool owns shares of Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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