Review & Outlook

Our take on the investing, financial, & economic themes of the day

Boeing’s Airplane Business is Skyrocketing

Businessweek reported some eye-popping numbers today about Boeing’s 737 family of airplanes. The 737s include four models of relatively short narrow-bodied planes that range in length from 102 to 138 feet. They are popular because their fuel efficiency cuts down on costs for airlines.

The company currently churns out forty-two 737s every single month and has plans to ramp up to 47 in the next several years. This may seem like a lot, but Boeing is still struggling to keep up with demand. The article says,  “Boeing has collected 550 orders for the 737 so far this year, and it has delivered 278, with an overall backlog of more than 5,200 airplanes.” The 737 makes up about 25% of Boeing’s airplane business.

(Source: boeing.com)

Boeing is one of O’Brien Greene’s core industrial holdings. After a tremendous year last year when the stock was up more than 80%, it is taking a breather so far this year, down 8%.

Air traffic around the world is growing steadily, and there is huge demand for planes now coming from emerging markets. So why is the stock stalling this year? One reason is Boeing’s other big business besides commercial airlines, which is defense.

In its recent second quarter earnings Boeing reported that defense earnings fell 6% from last year. This put a dent in overall sales, which rose a lackluster 1% and missed analyst estimates.

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Sequestration and general budget worries have taken a toll on Boeing’s defense business as some big orders have been postponed or canceled. Making things worse, the Republicans in Congress are challenging the Import-Export Bank, a government funding mechanism that helps Boeing compete with its largely state sponsored rivals in Europe.

Department of Defense contracts is only one part of Boeing’s business, though, and it is a temporary setback. The Department of Defense will continue to need to planes and other equipment once political squabbling is resolved. Boeing also remains confident that the Import-Export bank funding will continue.

Overall, Boeing is in extremely good shape. It has a very strong balance sheet and cash flow with a solid 2.3% dividend yield. Despite its amazing growth recently, it still has a very reasonable price-to-earnings ratio around 16, which is roughly in line with the average P/E of the market. Given Boeing’s strong long-term growth prospects, this seems like a bargain.