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Robert Stephens, CFA
Robert Stephens, CFA
Articles (44) 

Boeing: Strategic Shifts Could Lead to a Rising Stock Price

Boeing’s future investment potential appears to be relatively impressive

July 11, 2018 | About:

The performance of Boeing (NYSE:BA) in the first quarter of its current fiscal year has been highly encouraging. The company recorded an increase in revenue of 6% versus the same period in the prior year, with it rising to $23.4 billion. This was on the back of 184 commercial deliveries, alongside higher defense and services volume.

Core operating earnings increased by 35% to $2.5 billion, with the core operating margin gaining 220 basis points to 10.7%. The company’s operating cash flow was $3.1 billion, which represented a rise of 49%. Backlog grew to $486 billion, which includes over 5,800 commercial aircraft.

Guidance for the full year was raised following the strong first quarter. Boeing now expects an operating margin of 11.5% for the 2018 fiscal year, which is 50 basis points higher than previous guidance. It also increased its forecast for operating cash flow, with a figure between $15 billion and $15.5 billion (versus previous guidance of $15 billion) expected for the current year.

Improving outlook

The performance of the Boeing stock price in the last year has been positive. It has risen by 66%, while the S&P 500 is up by 15%. Since its first-quarter results were announced on April 25, the stock has continued to make gains. It has risen by over 5% since then.

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Further stock price growth could be ahead for the company. It has seen widebody sales accelerate during 2018, with 141 widebody orders being recorded in the first six months of the year. The company has a dominant position in the widebody segment, with its orders in 2017 being 167 versus just 55 for Airbus (XPAR:AIR).

The company believes further growth could be ahead in the widebody segment, with it anticipating that replacement demand for existing aircraft will cause a rise in sales from the start of the next decade. Alongside this, demand for the new large widebody 777X aircraft means that over the next 20 years, Boeing believes the global widebody passenger fleet will double to 8,200. This could provide it with a strong growth catalyst – particularly since it has a dominant position in the small widebody segment via the 787 Dreamliner, where much of the growth is expected to take place.

Operational outlook

Boeing is also seeking to improve margins in its commercial segment, with it aiming to generate a mid-teens margin over the medium term. One strategy it is pursuing in order to achieve this is to reduce costs across its supply chain. It is seeking to do so by manufacturing a larger number of parts for its own planes. This will not only help to reduce costs, but could also allow the company access to the lucrative aftermarket segment. This is where suppliers have historically generated the majority of their profit.

As a result of this strategy, the company has already partnered with France’s Safran (XPAR:SAF) to develop auxiliary power units. It has also purchased aerospace parts company KLX for $3.2 billion, while moving ahead with a joint venture alongside Adient (NYSE:ADNT) to develop and manufacture seats for commercial aircraft. With the business aiming to generate $50 billion in sales within 10 years from its Global Services segment, it could have a significant impact on overall revenue and profitability.

Trade war risk

Between now and 2036, China is expected to become the largest domestic air travel market in the world. During this time, its passenger numbers are due to rise by 921 million to reach 1.5 billion. This means the Asia-Pacific region is expected to be the source of more than 50% of new passenger growth over the next 18 years, which indicates companies with strong positions in the region could enjoy a significant tailwind.

As a result, the U.S.-China trade war could hurt the company’s long-term outlook. China is apparently more likely to favour Airbus or Commercial Aircraft Corp. of China when it comes to new orders, as it seeks to respond to possible U.S. tariffs on Chinese exports. This could mean that Boeing fails to capitalize on the growth potential of the country since all of its aircraft purchases are managed centrally. However, with what remains a healthy global order backlog and continued strength in terms of recent order wins, the company’s financial prospects still remain relatively upbeat.

Verdict

Boeing has made a strong start to the 2018 fiscal year. The share price growth recorded over the last year could continue over the medium term, with the company set to enjoy a tailwind from increased orders for widebody aircraft. The company has a dominant position in this segment, and may be able to capitalize on further growth potential.

Additionally, its move into the lucrative aftermarket sales arena could provide higher sales as well as lower costs. As a result, the stock could have investment potential for the long term, with growing demand across the industry set to take place in the coming years.


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