Why Boeing Stock Is A Good Investment For The Long Haul

  • Boeing has delivered strong Q3 2015 results that topped both top and bottom line expectations.
  • But more importantly Boeing's cash flow improved tremendously which points to improving production efficiencies.
  • Boeing has plans to significantly ramp up production of its leading models over the next few years.
  • This will improve margins, cash flow and earnings considerably making the stock a good long-term holding.

Boeing (NYSE:BA) has topped Q3 expectations and raised its guidance. The giant airplane manufacturer reported revenue of $25.8 billion, good for Y/Y growth of 9%. The company also reported core operating earnings of $2.6 billion and non-GAAP EPS of $2.52 vs. $2.4 billion and EPS of $2.14, representing a healthy 18% Y/Y growth. Boeing’s revenue segments performed as follows:

  1. Commercial Airplanes (the largest segment accounting for more than two-thirds of revenue) increased 10%.
  2. Military Aircraft revenue grew 15%.
  3. Network and Space Systems revenue grew 5%.
  4. Global Services & Support revenue fell 8%.

It’s worth noting that the defense segment which has been in decline for many quarters now recorded the highest growth. This might point to an end to the [in]famous defense budget cuts of three years ago which took a toll on defense aircraft manufacturers.

Commercial Airplanes booked net orders (after deducting cancellations) of 166. This means that Boeing has delivered 580 commercial jets during the first nine months of 2015 compared to 528 for the prior year comparable period, a healthy 9.8% growth. 2014 was a record year for Boeing after it delivered 723 commercial jets, the most by any manufacturer including rival Airbus, in any given year. Boeing projects it will deliver 750-755 commercial jets in 2015, thereby setting another industry record.

Boeing’s free cash flow jumped to $2.3 billion from just $317 million a year ago due to lower capex and lower pension contributions.

Boeing’s total order backlog by the end of the third quarter clocked in at 5,700 planes valued at $426 billion. At current production rates, it would take the company about seven years to work through that backlog.

Meanwhile, Boeing upped its full-year revenue and EPS forecast from an earlier range of $94.5B-$96.5B and $7.70-$7.90 per share to a new range of $95B-$97B and $7.95-$8.15 per share for revenue and earnings, respectively.

Boeing stock is up 14.2% YTD and 21.6% over the past 12 months having tucked on about 6% since the latest report.

Boeing 12-Month Share Returns

BA stock chart

Source: Boeing stock price data by amigobulls.com

787 Dreamliner at an Inflection Point

But perhaps the most important takeaway from Boeing’s latest earnings report, and one that buttresses the thesis of the company being a good long-term holding, is the massive increase in operating cash flow. Boeing’s operating cash flow for the first nine months grew a healthy 62% to $6.24 billion from $3.86 billion from the prior year comparable period.

Former Boeing chief executive Jim McNerney had, for long, been insisting that investors ought to judge the company’s performance more on a cash flow basis than on earnings. But Boeing’s new 787 Dreamliner that it’s pinning its future hopes on has been a huge drain on cash, with estimates that the company will lose about $80 million for every 787 delivered for the first 350 planes or so. It’s normal for a newly launched model due to production inefficiencies and low sales volumes. But once a manufacturer ramps up production volumes and figures a way to cut back on inefficiencies, many models are able to later become profitable. The problem with 787 is that its losses were so high that some analysts feared the model might never be able to sell at a profit throughout its entire production cycle.

Boeing had earlier assured investors that 787 Dreamliner will be able to turn a profit as early as the end of the current year. Although Boeing did not provide information on whether the company is still on target to achieve that target, it appears as if this might be the case judging by the strong growth in operating cash flow.

The good news is that the company might be able to realize cost efficiencies for 787 and other models in the near future through higher production. The company said that it plans to ramp up production of the 787 in 2016 and 2019 with a goal to increase its monthly rate by 40% over the period. Boeing also plans to increase the production of the 737 in 2017 and 2018 by about 24%. Higher volumes means that the company will be able to effectively leverage its fixed costs and lower its cost of production per plane and in the process increase the bottom line.

Overall, Boeing projects that it will be able to grow the operating margin for the commercial airplane segment from the current 9% to mid-teens over the next couple of years. Over the long-term, Boeing projects that it will deliver 36,770 planes over the next decade or so, pointing to about 1,838 planes per year, significantly higher than the 750 it will deliver in 2015.


Source: Market Business


Boeing appears to have ample growth runways both in the medium- and long-term. Over the next couple of years, the company is likely to see considerable growth in cash flow and earnings as it ramps up volumes of its leading models and improves cost efficiencies. Boeing stock, which is cheap trading at just 15 times forward earnings, is likely to benefit a good deal from these tailwinds.

Brian Wu Brian Wu   on Amigobulls :
Author's Disclosures & Disclaimers:
  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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