Air travel is one of the sectors to gain from the sharp drop in worldwide oil prices. While the weak oil price boosts economic fundamentals, it will also result in more and more people preferring air travel than any other mode. That means companies likes Boeing Co (NYSE:BA) are going to be the beneficiary. The realization of benefits from the weak oil price reaches the makers of airplanes only finally. Aside from that, the company has always been given tough competition to Airbus Industry and was able to win orders even under tough conditions. The stock is one of the few to look strong on fundamentals.
Well-Run Company
Boeing Co (NYSE:BA) is a leader in the industry and set to witness further growth on a long-term basis. The company has been run well over the years. The company will carry on in influencing its position as a reliable one to enhance the contract, as well as customer acquisition. Based on future earnings and relevant multiples, the stock might be looking undervalued. The maker of aircraft has performed well in the past and looks poised to increase its profit steadily in the coming years too. The weak oil will be an added advantage, since it will gain from the robust results of the domestic commercial airline firms.
The company recorded 5% growth in sales last year. S&P Capital IQ estimates Boeing Co (NYSE:BA) to witness a 4.7% sales uptick in the current year. The growth will be fueled by the Commercial Airlines division where the brokerage expects a 20% uptick on higher revenues from its B737, as well as B787. That apart, the company will gain from increased deliveries, as well as production rates in the current year. However, the Defense, Space & Security division of the company might suffer due to lower spending from the defense in the United States. But, the global sales from the segment will partly offset the domestic weakness.
Margins To Grow
The company is likely to gain from EBITDA margins that recorded 10.3% in the last year. In the current year, this will grow modestly to 10.5% and to 11.4% next year, according to the S&P Capital IQ estimations. The enhancement will come from reduced headwinds on pension, apart from improved margins from commercial airplanes. However, part of the improvement in margins will be offset by weakness in defense, space & security will fall partly. Boeing Co (NYSE:BA) is also likely to report enhanced EBITDA margins from its commercial finance division. However, the company is likely to witness cost escalation in respect of its KC-46 tanker program, leading to higher than estimated costs in the current year.
The aircraft maker’s CEO, Dennis Muilenburg, said that its tanker program is important for its customers. He is confident that the financial value of the program will get the reward in the long-term. The company’s strength lies in its portfolio and, with due diligence, it was able to achieve record commercial airplane deliveries in the second quarter.
Price Appreciation
Boeing Co (NYSE:BA) will likely see price appreciation in the next several years. That is primarily due to strong commercial aircraft demand, apart from the production ramp ups of B787 and B737. The cash returns through share buyback will also increase with available free cash flow, to $2.61 billion at the end of the second quarter. S&P Capital IQ believes that additional orders for B787, as well as B777X will fuel a re-acceleration in aircraft orders. The company’s dividend payout ratio increased to 45%, compared to 36% of the five-year average. Similarly, the average dividend growth in the last three-year period is 24.6% due to three straight years of dividend increase.
The aircraft firm is projected to earn $7.96 a share of operating earnings in the current year. S&P Capital IQ expects the operating EPS to grow further, to $9.68 next year. The brokerage expects free cash flow to be approximately equal to net profit in the current year, as well as the next year. Boeing Co (NYSE:BA)’s ten-year PE average was about 19.5X. In the last cycle of commercial aerospace orders, i.e. 2004 – 1007, PE averaged an 18.5 multiple, which ranged 15x – 24X. The brokerage is setting a one-year price objective of $180, based on 18.6X next year EPS estimation. Another valuation report suggested that its forward PE is 15.6X and the price based on expectation is attractive at 0.3X. The EPS is likely to witness an average 11% growth in the next five years. After giving effect to future cash flow, the fair valuation was pegged at $195.
Risk Profile
Nothing will remain without risks. Therefore, the aircraft maker will also witness some risk factors. For instance, China’s economy will be a negative factor. The second risk is a drag on orders from the United States’ defense spending. Boeing Co (NYSE:BA) might also be impacted by contract losses or delays or cost overruns while bringing in additional aircraft.
There is also a threat of economic growth slowing down globally. Any strength in the oil price might impact its new order. Therefore, the concerns will be there on one side while the positives of other factors could overcome it.
Conclusion
Currently, Boeing Co (NYSE:BA) enjoys the confidence of the investors. The company provides an attractive dividend. The emerging markets will remain a key market for the company’s growth potentials. The weak oil price will drive the air-carriers to launch different services by acquiring more aircraft. The company’s working with the improvement of the competition and the focus is on enhancement, as well as cost reductions. There is less opportunity to witness downtick and the company is poised to advance in the days to come. Those who missed the bus earlier could still enter.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.