Can Boeing Lead The S&P 500 Higher Again In 2018?

The year 2017 has been an overwhelming one for The Boeing Co. (NYSE:BA) , with the aerospace giant winning a series of billion-dollar orders for commercial jets. In addition, being one of the largest defense contractors, with a market cap of more than $175 billion, this market mover has led the S&P 500 index to new highs multiple times in 2017. Evidently, Boeing’s share price has surged 89.7% so far this year, which more than quadrupled the S&P 500’s gain of 20.1%.

Compared to its arch-rival Airbus Group (OTC:EADSY) as well as other peers like Lockheed Martin Corp. (NYSE:LMT) and General Dynamics Corp. (NYSE:GD) , this was a notable achievement for Boeing, since none of these stocks gained more than 55% year to date. The company also delivered the latest model of renowned 737 fleet — the 737 Max — in May 2017. Ever since, the company has been witnessing solid order growth for this particular model from varied customers.

Below we have discussed the factors which have helped Boeing outperform the broader market this year. The company currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Commercial Orders: A Major Growth Driver

Boeing is well known for winning notable commercial orders for its renowned aircraft each year. At the Paris Air Show and the Dubai Air Show in 2017 the company won a number of billion-dollar orders. At the Paris Air Show, the company won a $6.2-billion deal for delivering 50 737 Max 10 jets to Lion Air Group, a $2.2-billion deal for delivering up to 40 737 Max to ALAFCO, a $2.5-billion deal for 20 737 airplanes, an $8.1-billion deal for 30 787-9 Dreamliners, a $7.4-billion deal for a number of 737 10s, 737 8s and 787-9 Dreamliners to CDB Aviation among others.

Dubai Air Show 2017 also witnessed some landmark deals involving Boeing. The company won a deal worth $15.1 billion for delivering 40 787-10 Dreamliners to Emirates airline, a $27-billion deal for delivering 225 737 MAX airplanes to flydubai airlines, a $2.2-billion order for supplying 20 additional 737 MAX 8s to ALAFCO and a $1.9-billion order for five more 787-8 Dreamliners and a commitment to purchase two large freighters.

Needless to Say, such huge flow of commercial orders aided Boeing’s growth. Notably, the company’s 737 model remains one of the best-selling planes in the single-aisle market, thanks to its fuel efficiency and passenger comfort. Interestingly, majority of the commercial orders Boeing won in 2017 belonged to the 737-fleet.

Considering the fact that 737 is the fastest-selling airplane in Boeing’s history, exceeding 4,000 total orders from 92 customers, such huge order growth will aid the 737 model to maintain its leading position in the single-aisle jet market.

Solid Demand Aiding Boeing

Demand for Boeing’s commercial airplanes is on the rise due to a steady improvement in passenger and freight traffic. Per Boeing's current market outlook, the world will need 41,030 new planes, worth $6.1 trillion between 2017 and 2036. Boeing also expects the commercial fleet to be fueled by sustained 4.7% annual growth in commercial passenger traffic.

Single-aisle jets are expected to be the major demand driver, comprising 72% of the total projection. This translates into worldwide demand for 29,530 single-aisle jets, worth $3.2 trillion, in the next 20 years, reflecting 5% increase over last year's projection. Boeing, being a leading company in single-aisle jet production, on virtue of its 737 model expects to raise the 737 production rate from 47 per month in 2017 to 52 per month in 2018. This surely reflects the optimism that Boeing boasts toward increased demand for its 737 fleet of jets.

Apart from its strong forte in the United States, the company expects that China will need 7,240 new planes worth $1.1 trillion over the next 20 years. India will need 2,100 new planes worth $290 billion in 20 years, up 13.5% from the year-ago estimate of 1,850 planes

In the Middle East, Boeing expects to witness demand for 3,350 new planes worth $730 billion between 2017 and 2036. Single-aisle jets worth $190 billion are projected to comprise over 50% of the total deliveries in the Middle East. Such expanding market outlook surely indicates increased growth prospects for Boeing.

Defense: Another Glowing Business

Boeing’s defense business stands out among its peers by virtue of its broadly diversified programs, strong order bookings and order backlog. The company’s third-quarter 2017 defense deliveries were 44 units. Total deliveries consisted of 18 AH-64 Apache (NYSE:APA) helicopters (both new and remanufactured) and 11 Chinook helicopters (new and renewed), six F/A-18s, five P-8 models and four F-15s.

Boeing remains on track with the $52 billion KC-46 aerial tanker program. Boeing is scheduled to complete delivery of all 179 aircraft by 2027. Apart from the KC-46 aerial refueling tanker program, the new organization will also oversee the building of the presidential aircraft for the Air Force along with the CST-100 spacecraft for NASA. Considering the $700-billion fiscal 2018 defense bill sanctioned by the U.S. Senate this September, the defense business of Boeing is expected to gain traction in coming days.

New Business Ventures

Boeing has lately taken initiatives to expand in an unconventional business line — the “Space.” The company’s management has identified satellite business and space exploration as the two "key" opportunities to generate growth. In particular, Boeing has teamed up with NASA’s Space Launch System (SLS) to deliver “Deep Space Gateway” and “Deep Space Transport.” While, the Deep Space Gateway is a space outpost, the Deep Space Transport is a vehicle that will take humans to longer-duration space missions. Management expects to construct the gateway in four launches by the early 2020s.

Interestingly, fiscal 2018 budget has allocated $3.7 billion for SLS and associated ground system. Once the deep space gateway and transport vehicle concepts are materialized, Boeing, being the prime SLS contractor, will gain the most.

Restructurings to Add Value

In June 2017, Boeing decided to lay off 50 executives from its Defense, Space & Security (BDS) segment. Simultaneously the company also decided to break down its Military Aircraft and Network & Space Systems segments into four smaller units. At that time Bloomberg announced that 60 defense executives will be transferred to Boeing Global Services. This new unit, incorporating defense and commercial aircraft parts, maintenance, and information technology products, is expected to evolve into a $50-billion business.

Constituting more than 21% of the company’s total earnings as of third quarter of 2017, BDS unit holds a significant key to Boeing’s growth story. The company’s management has been focused on reducing cost and inducing enhanced competitiveness and growth in this segment recently. Toward this end, last November, some consolidation initiatives were announced, under which by the end of 2020, its facility spaces were aimed to be reduced by approximately 4.5 million square feet, causing layout of 500 employees.

We believe the executive lay-off decision was a bold one taken by Boeing’s management, going a step ahead of what it has done earlier. Such a notable job cut will clearly save money for the company, which, in turn, can be reinvested to boost further growth of its defense unit.

Solid Cash Flow Aiding Dividend Hike

Boeing has been rewarding shareholders with lucrative dividend hikes. Earlier this month, the company boosted its quarterly dividend by 20.4%, bringing the quarterly payout to $1.71 per share and the annualized payout to $6.84. Along with the dividend hike, Boeing also authorized a new stock-repurchase plan of $18 billion, which replaces the existing share buyback program.

Impressively, Boeing has increased its dividend per share by more than 250% over last five years. Also, the company has been consistently paying dividends to shareholders each quarter for over 75 years. A solid cash flow structure primarily supports this dividend payouts for Boeing. Evidently the company boasts solid cash and investments in marketable securities worth $10 billion, as of September 2017. Its cash flow from operating activities at the end of the third quarter of 2017 was $10.4 billion compared with the year-ago quarter figure of $7.7 billion.

Should You Invest in BA?

We consider that Boeing is a profitable stock which can be a prudent long-term bet for risk averse investors. Year to date, the company’s share price has gained 89.8% compared with Zacks Aerospace-Defense industry’s rally of 44.3%.

On the valuation front too, the company looks very attractive. The stock currently has an earnings yield of 3.3%, falling below the S&P 500 average of 4.8%, thereby reflecting scope for improvement. Moreover, the company’s long-term earnings growth rate of 13% is more than that of industry’s 11.7%.

Further, Boeing has a VGM Score of A. Notably, the VGM Score rates each stock on their combined weighted styles, helping to identify those with the most attractive value, best growth, and most promising momentum, across the board. This assures our point that the stock has still plenty of potential.

To conclude, factors like solid cash flow offering financial stability to Boeing, huge jetliner demand play a vital role for investors to choose this stock as a profitable investment option, which in turn will enable Boeing to maintain its stellar performance and lead the S&P 500 in 2018 as well.

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