Boeing Investors: Keep Your Shares On Autopilot For Now

By Robert Fisher - January 26, 2012 | Tickers: BA | 0 Comments

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Boeing (NYSE: BA) is the world's largest aerospace firm as well as the largest manufacturer of commercial aviation jets and military aircraft.  Boeing is in an elite club, being one of the 30 companies that comprise the frequently referenced Dow Jones Industrial Average, and has been a Dow component since March 1987.  Boeing’s 2010 net income was $3.3 billion on $64.3 billion in revenues with a market cap of $55.5 billion.  The EADS Group, a European consortium of aerospace and defense companies (and Boeing’s largest competitor) reported 2010 net income of €553 million ($719 million) on €45.8 billion ($59.5 billion) in revenues with a market cap of €19.9 ($25.9 billion)*.

Most of Boeing’s 2009 and 2010 revenue is roughly split evenly between its two main operating divisions: Boeing Defense, Space & Security and Boeing Commercial Airplanes.  Defense, Space, and Security 2009 and 2010 revenues were $33.7 billion and $31.9 billion, respectively.  Boeing Commercial Airplanes revenues for those years were $34.1 billion and $31.8 billion, respectively.  Boeing also operates a captive finance subsidiary, Boeing Capital Corporation, that provides financing to Boeing customers.

Boeing’s price-to-earnings ratio is a very attractive 14.92, compared to 13.04 for the broader market (S&P 500), and 37.9 for EADS making it a great value within the aviation/defense sector as well as the market overall.  Boeing trades in a 52 week range $56-$80.65.

I expect Boeing’s revenues in its Defense, Space, and Security division, however, to be vulnerable to the ongoing malaise in the U.S. economy.  Recently, the Obama Administration announced $1 trillion in defense spending cuts over the next decade to reduce the strain on the federal budget.  These cuts will impact all defense contractors and Boeing more severely since it is such a dominant player in the field.

Earlier this month, Boeing announced plans to close its facility in Wichita, Kansas and lay off more than 2100 workers in an effort to consolidate, cut costs, and streamline operations.  The Wichita facility makes B-52 bombers and modified 767 aerial refueling tankers for the U.S. Air Force.  The layoffs, which will begin in the third quarter of this year, are expected to be complete by the end of 2013.

Now, as any first year MBA student will attest, when a business is faced with shrinking margins and declining revenue in a mature market (like Boeing’s domestic defense business); the company needs to seek growth opportunities elsewhere.  Unfortunately, for Boeing’s Defense, Space, and Security division, this growth cannot be fully realized.  Boeing is unable to freely expand into international markets to sell its wares like, say, a McDonald’s opening up a new restaurant in Beijing or Wal-Mart expanding operations in Brazil.

This is because The U.S. State Department strictly monitors and regulates the sales of military hardware, weapons systems, technology, etc. of U.S.-based companies under the International Traffic in Arms Regulations (ITAR) within the Arms Export Control Act (22 U.S.C. 2778).  As a company that manufactures military hardware and defense systems, Boeing must comply with ITAR and not sell to “foreign persons” (read: foreign governments) that may be eager willing customers but deemed a national security threat to The United States.  Of course, the prudent investor wants strong national security just like everyone else.  But realize ITAR compliance restricts earnings and stock appreciation for a company like Boeing.  On one hand, The U.S. Government is Boeing’s biggest customer.  On the other hand, it is the watchful police.

Additionally, Boeing was also a major supplier and servicer to NASA and integral with the Space Shuttle and International Space Station.  With the end of the Space Shuttle program marked by the final launch of Atlantis in July 2011, Boeing is losing yet another major government contract and revenue stream for its Defense division.  Defense, Space, and Security revenue declined 5% from 2009 to 2010 and I do not expect the trend to reverse anytime soon.

For all the afflictions in Boeing’s Defense, Space, and Security division the glimmer of hope is its commercial aircraft division. In recent years, both Boeing and the EADS subsidiary, Airbus, embarked on building the next generation of super jumbo jets.  Early on, Airbus appeared to be winning the race bringing these behemoths to market.  The Airbus A380 seats 525, has a range of 9100 miles, and made its first commercial flight in late 2007.  Boeing was the laggard with its much smaller 787 Dreamliner, which seats 290 and has a range of 8000 miles.  The 787 Dreamliner made its first commercial flight only late last year.

The 787 Dreamliner is now regaining market share as Airbus falters with A380 production delays, declining orders, and increasing cancellations from airlines.  Boeing’s aircraft deliveries were up 10% in the fourth quarter of 2011 compared to the same period in 2010.  Although Boeing Commercial Airplanes division also experienced a 5% revenue decline from 2009 to 2010, I forecast this trend will reverse.

I anticipate revenue growth from Boeing Commercial Airplanes will offset the lost revenue in the Defense, Space, and Security Division.  My opinion of Boeing in the near term is that it will generate returns similar to the overall market.  If you are a current Boeing shareholder, just keep your shares cruising on autopilot for the time begin but do not add additional shares to your portfolio.

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