Investors who are able to purchase stock in companies that are a monopoly or part of an oligarchy are usually rewarded over the long term. What could be better than investing in a company with limited competition? So it has been, and so it will continue to be, with The Boeing Co. (NYSE:BA).
Outside of Boeing and Airbus, there simply aren’t companies making commercial jetliners in any great capacity. That’s obvious when you look at Boeing’s earnings report from Wednesday. Let’s take a look at the numbers and interpret what they mean, on both a macro and company level.
The company earned $1.47 billion, or $2.02 per share, in Q4, up from $1.23 billion, or $1.61 per share, last year. Core earnings, which the company reports in order to back out pension costs, rose to $2.31 from $1.88, up 23%. It is indeed the commercial jetliner business that’s on fire, with operational earnings from that sector up 11%. That was driven by the company’s shipping of 195 planes in Q4, up from 172 the year before. In total, it delivered 723 planes all of last year, up 12% from 648 planes in 2013.
All in all, it was a very robust year for Boeing. Q4 was not an anomaly, as FY14’s net income was up almost 19% to $5.4 billion. It’s all expected to continue next year, with 750 planes being delivered, revenues between $94.5 to $96.5 billion, and operating earnings between $8.20 to $8.40 per share.
Airlines are Back
What’s driving demand? There are several secular factors at play. First of all, the airlines are back on track. After years of bankruptcies and mergers, the airlines have popped out of caves of insolvency, ready for battle. They are charging passengers for everything short of breathing, have trimmed debt, boosted cash flow, and now enjoy the benefits of lower fuel prices.
The airlines, quite simply, have the money to upgrade their fleets and they are doing it with Boeing and Airbus, as well.
This also plays into a secular trend involving the resurgence of both business and leisure travel. With the financial crisis behind us, businesses started sending employees on travel quite some time ago. Results from the entire hotel sector have been strong, as have numbers coming out of resorts and theme parks. Everyone is traveling again. Demand is high, and that has driven orders for airplanes.
Pentagon Budget Cuts
The only downside, and it hasn’t been huge yet, is in Boeing’s military and commercial aircraft sector. That segment’s revenue was down 7%, hurting operational earnings by 3%, as there were fewer deliveries of F-15 and C-17 aircraft.
This is the result of budgets cuts at the Pentagon, which go back to the sequester (remember that, anyone?). Our military has been weakened by reduced defense spending and it shows up in results at places like Boeing. That may be the case for a few more quarters.
At $140, Boeing trades at about 18x FY15 projected earnings of $8.64. That’s in tuen with the 18% EPS growth it just reported, so it seems fairly valued. It remains one of the best free cash flow generators in the blue-chip category, which provides it with a long-term cushion.
I think Boeing remains a buy for a long-term portfolio.