Every Thursday we bring you one of our recommended U.S. stocks. These picks come from our newsletter on U.S. investing, Wall Street Stock Forecaster,or from our advisory for more aggressive investing, Stock Pickers Digest. Today, a report on how Boeing’s success with new planes—the 787 Dreamliner in particular—has confirmed it as a leading blue chip among aircraft manufacturers.
BOEING CO. (New York symbol BA; www.boeing.com) is a leading maker of passenger jets, from which it gets 70% of its revenue and earnings. The remaining 30% comes from making military aircraft and satellites.
The company continues to benefit as the improving economy encourages airlines to upgrade their aging fleets. Its revenue rose 41.1%, from $64.3 billion in 2010 to a record $90.8 billion in 2014. Overall earnings jumped 79.0%, from $5.0 billion to $8.9 billion, while per-share profits gained 93.3%, from $4.45 to $8.60, on fewer shares outstanding.
A big part of the company’s success comes from new planes it has developed in the past few years.
These models include its 787 Dreamliner, which is up to 30% more fuel efficient than older models. Production problems delayed the plane’s initial launch to September 2011, but Boeing has now sold 269 Dreamliners and has orders for another 1,100.
The company is also doing a good job of upgrading existing designs with new materials and engine technology. For example, its new 737 MAX is the latest version of its narrow-body 737, which first flew in 1967. Boeing has firm orders for over 2,700 of these planes and expects to begin deliveries in 2017.
Strong demand for commercial aircraft is helping the company offset weaker demand for military aircraft as governments cut spending to manage their budget deficits. However, Boeing sells its defence and space products under fixed-price, long-term contracts, which cuts this division’s risk.
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Blue chip: With 787 Dreamliner in flight, Boeing lowers research costs by 26%
Now that the 787 has moved from design to production, Boeing spent $3.05 billion (or 3.4% of its revenue) on research in 2014, down 26.1% from $4.12 billion (or 6.4%) in 2010. Government grants and deals to share development costs with suppliers also help Boeing offset its research costs.
Meantime, the company’s balance sheet remains sound. As of March 31, 2015, it held cash and investments of $9.6 billion, or $13.88 a share. Its long-term debt of $8.9 billion is a low 9% of its market cap.
Boeing plans to use its cash to buy back $12 billion worth of its shares. There are no time limits for these purchases. The company also raised its quarterly dividend by 24.7% with the March 2015 payment, to $0.91 a share from $0.73. The new annual rate of $3.64 yields 2.5%.
The high U.S. dollar hurts the contribution of Boeing’s overseas operations, which supply 60% of its revenue. As a result, its 2015 earnings will probably fall to $8.30 a share.
The stock trades at 17.2 times that forecast, which is still a reasonable multiple, particularly as Boeing’s backlog of $495.1 billion (88% commercial aircraft, 12% defence) is equal to 5.5 years’ worth of revenue.
Recommendation in Wall Street Stock Forecaster: BUY.
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