2/26/2013 6:15 PM ET|
Buy the next Boeing?
The company dominates the market for big commercial jets, but problems with Its 787 Dreamliner mean it's time for investors to look for alternatives.
Let's be honest. One problem jet won't ground Boeing (BA) forever.
The problems with its 787 Dreamliner notwithstanding, the company remains one of America's great industrial giants. Thanks to the success of the Boeing 707 and the 747, it was the key player in the transformation of commercial aviation from a propeller-powered business into a jet-propelled business.
But is Boeing a good investment now? Or are there better bets in aviation stocks, perhaps even a "next Boeing" that will topple the giant down the line?
The answer to the first question depends on how successfully -- and how quickly -- Boeing deals with the battery problems that grounded its Dreamliners last month. (Tests of a fix to the problem may start in early March.) There's also the potential for a strike in the next six weeks. And the federal government, a key customer, has fiscal problems. For investors, that's a lot of worry that could limit gains for some time.
The answer to the second question is more complicated, because there aren't a lot of alternatives in the sector. The market for big commercial airliners is basically Boeing and Airbus, owned by European Aeronautic Defence and Space (FR:EAD). EAD's stock has performed better recently, but it has a problem jet of its own.
So the better bets are in smaller names carving out their own niches. Two possibilities are Embraer (ERJ), the Brazilian airplane maker, and Canada's Bombardier (BDRBF), both of which concentrate on smaller planes for regional use.
I'll look at these Boeing alternatives in a moment. First, let's take a closer look at where Boeing stands.
Takeoff and hard landings
A case for investing in Boeing right now would assume three things:
● The Dreamliner's problems are fixed fairly quickly, say in three or four months.
● Global demand for midsize to large planes doesn't fade away, despite the airlines' many woes.
● Defense spending remains at least steady, despite U.S. fiscal woes.
Those risky propositions are certain to try Boeing investors' patience. Which is sort of the way things go with Boeing.
This is a classic cyclical stock that moves up and down with economic and product cycles. For an investor, Boeing requires great stamina or, better, a clear plan on when to buy and when to sell.
It frequently enjoys gains of 200% or 300% over, say, a three-year period. These gains are often followed by painful swoons of 40% or more. After the Sept. 11, 2001, terror attacks, Boeing lost a third of its value in a matter of days.
Between a peak in the late 1960s and a bottom in 1971, the stock fell 88% as the development of a supersonic transport to compete against the Concorde was called off. Boeing laid off 54% of its Seattle-area workforce. One result was a legendary billboard: "Will the last person leaving Seattle -- turn out the lights."
In the 2007-2009 financial crash, Boeing fell more than 70%. Since its bottom in 2009, the stock is up 156%, compared with 114% for the Dow Jones Industrial Average ($INDU) and 125% for the Standard & Poor's 500 Index ($INX).
But the stock hasn't closed above $80 a share since June 2, 2008. It topped $80 on an intraday basis in May 2011. It had a 16% gain between June 1, 2012, and Jan. 3, but the Dreamliner problems and the budget wars in Washington, D.C., emerged soon after, and the stock has been stuck between $75 and $77 since. That's actually good news for the stock; many thought the Dreamliner woes would hit the stock hard.
When big and old is a good thing
Being big helps Boeing weather a lot of storms. Boeing sits around 39th in terms of revenue among stocks in the Fortune 500. Revenue hit $81.7 billion in 2012, up 18% from 2011.
It's also a relatively old company, founded in 1916 by William Boeing, a young lumberman from Michigan who found flying much more exciting. Boeing's age is also a positive, because it means Boeing has experience and credibility when it comes to working out the bugs in complex machines such as airplanes, rockets and helicopters. Its expertise and credibility -- along with that of Airbus -- also mean that there are plenty of reasons for other companies not to try to compete against the pair, says noted aviation consultant Richard Aboulafia.
Indeed, most rivals have either left the commercial jetliner field or disappeared altogether. In 1984, defense giant Lockheed stopped building the L-1011, a respected wide-body tri-jet, because it couldn't make enough money on it. Now Lockheed Martin (LMT) after its 1995 merger with Martin Marietta, is content to be the top defense contractor.
McDonnell-Douglas merged with Boeing (and, in effect, took it over) in 1997 and killed off the former's MD-80 and MD-11 family of planes. The Dutch company Fokker built two short-range jets that couldn't compete, then stepped away and ultimately went out of business. That left basically Airbus, itself an amalgam of Germany's Deutsche Aerospace, Aerospatiale-Matra of France and Spain's Construcciones Aeronáuticas, as Boeing's only direct competitor.
No new competitors have stepped up. Both China and Russia have said they hope to get into the jetliner business, but it could be a decade before either is a strong challenger.
Being big and old, with experience and credibility, also means that Boeing has a huge backlog of orders: $372.3 billion at the end of 2012, up nearly 10% from a year earlier. About $317 billion of the backlog is commercial planes; the rest is defense orders.
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