Great Long Term Investments
Alvin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It is almost impossible to predict how long a company will live. However, as long as modern human civilization exists, people will always use some form of aircraft for international travel. Therefore, Boeing (NYSE: BA) and European Aeronautic Defence and Space Co (EADS) will always have a business. EADS is a European company that owns Airbus, the main rival of Boeing.
In 2011, for Boeing and EADS, commercial aircraft accounted for 52.6% and 61.9% of total revenue, respectively. This is positive for both companies because the US Federal Aviation Administration (FAA) expects airline passenger travel to almost double in 20 years. While doubling in 20 years is a modest growth rate, it is a very good growth rate for these large companies.
In the defense market, Boeing’s biggest competitors are Lockheed Martin (NYSE: LMT), General Dynamics (NYSE: GD), Northrop Grumman (NYSE: NOC), and Raytheon (NYSE: RTN). The following table shows these companies’ revenues in the last five years.
| Revenue (millions $ except for EADS) | 2011 | 2010 | 2009 | 2008 | 2007 |
| Boeing | 68,735 | 64,306 | 68,281 | 60,909 | 66,387 |
| EADS (millions Euro) | 49,128 | 45,752 | 42,822 | 43,265 | 39,123 |
| Lockheed Martin | 46,499 | 45,671 | 43,867 | 41,212 | 40,612 |
| General Dynamics | 32,677 | 32,466 | 31,981 | 29,300 | 27,240 |
| Northrop Grumman | 26,412 | 28,143 | 27,650 | 26,251 | 24,644 |
| Raytheon | 24,857 | 25,183 | 24,881 | 23,174 | 21,301 |
As shown, all six companies have been fairing well. However, Lockheed Martin, General Dynamics, Northrop Grumman, and Raytheon rely on the U.S. Government for 82%, 69%, 91%, and 74% of total revenue, respectively. Having the U.S. Government as a main customer is not necessarily a bad thing. After all, the U.S. has the largest military budget and the most advanced military in the world. However, spending cut is a risk and has happened many times in the past. Boeing and EADS have more protection against the effects of possible defense budget cuts.
Looking at the balance sheet, in the most recent quarter, Boeing had $11.201 billion of debt. Additionally, the company has a negative tangible book value of $2.84 per share. However, the company has a respectable dividend yield of 2.52%. Additionally, the company has a low PE of 12.2. Using the trailing twelve months EPS of $5.77, the current price of $70.45 (at the time of this writing), and taking into account the negative tangible book value of $2.84 per share, Boeing has a simple payback of about 13 years. That is good for a company with a very secure business future.
In 2011, Boeing had a contractual backlog of $339.657 billion. In comparison, in 2007, the backlog was at $296.964 billion. In addition, commercial airplanes accounted for the majority of the backlog. In 2011, commercial airplanes, accounted for a backlog of $293.303 billion. In 2007, this backlog was $255.176 billion. This projects a very strong future for Boeing.
Overall, Boeing has a great business model. The company has the majority of its business accounted for by the commercial aircraft industry. This percentage is even greater in Boeing’s backlog. This is an advantage because it reduces risks that come from relying on one major customer (e.g. the U.S. government). Boeing, EADS, Lockheed Martin, General Dynamics, Northrop Grumman, and Raytheon have no control over this risk. The commercial sector is more predictable because the global population is growing and, as a result, there will be more people that will travel in the future. Additionally, commercial aircraft eventually have to be replaced. Therefore, there is a sustained industry. This makes Boeing and EADS very good long term investments.
That being said, all these companies make good investments. Technology is rapidly advancing and the U.S. has to invest heavily in new projects to keep its military equipped with cutting edge technology. Additionally, these companies have exposure to the spacecraft industry. The spacecraft industry has a very favorable future because humans have an incredible urge to explore the universe and may eventually colonize other planets. In the (very) long run, the spacecraft industry will likely become a humongous industry and there is a good chance it will be these companies leading the charge. However, investors should favor Boeing and EADS because of their size and commercial exposure. Overall, they are all good investments.
Alvin has no positions in the stocks mentioned above. The Motley Fool owns shares of General Dynamics, Lockheed Martin, Northrop Grumman, and Raytheon Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.
