BOEING (BA) INVESTMENT THESIS

What would you say if there was an industrial company which was sold out of $500B worth of production for the next seven years at an 11% operating margin and that it was part of a global duopoly? Oh yeah, and it’s returning nearly all profits to shareholders through a Balanced Cash Deployment Strategy.

Boeing is the world’s largest commercial airplane maker, America’s second largest defense contractor, and a global leader in spaceflight.

INVESTMENT THESIS

The Investment Thesis for Boeing focuses on three areas

 1. CAPACITY GROWTH
Airlines need seats, logistics air carriers need volume. Seats and volume come on airplanes. Aviation is arguably the most attractive industrial market in the world estimated at a value of $7.5 trillion over the next ten years. In 2017, passenger traffic grew 7%, supported by a long term trend of 5%, and air cargo grew 9%. Boeing forecasts demand of 41,000 new airplanes over the next 20 years.

2. AIRCRAFT REPLACEMENT CYCLE
There are effectively three tiers of aircraft operators
Tier 1 operators order the newest, most efficient aircraft focusing on reliability, efficiency and profitability through economies of scale and scope within their established operating schedules.
Tier 2 operators focus on lower fixed costs and accept the higher variable costs of increased maintenance and lower fuel efficiency which can provide increased operational flexibility.
Tier 3 operators minimize fixed costs, placing a low priority on reliability and accepting high variable costs.

Tier 3 carriers might operate 737-200 aircraft, Tier 2 might operate 737-400 aircraft, and Tier 1 might operate 737-700NG aircraft. Through the replacement cycle, Tier 1 operators will purchase 737Max aircraft, the -700NG will get passed down to the Tier 2 operators at more affordable lease rates, and the -400 will move down to the Tier 3 operators.

The economies of scale and scope in aviation are transforming from low frequency jumbo jets to smaller, more efficient jets with higher frequency.

3. DEFENSE AND SERVICES GROWTH
There are high barriers to entry into the defence industry. Boeing Defence Space and Security operates the F-18, CH-47 Chinook, Ground-Based Midcourse Defense, AH-64 Apache, the V-22 and space launch system programs and currently has an order backlog of $50B with 40% of that from international customers. Boeing views the services industry as a key growth opportunity worth $2.6 Trillion over the next ten years. Boeing Global Services expects 2018 revenue of $15B at a 15.5% margin and is targeting growth to $50B over the next ten years.

CURRENT THREATS
Beginning in February 2018 a new threat was introduced, but it is just that, a threat at this point which has held back the stock price and caused the stock to trade within a broad range between $320 and $370. Tariffs as a result of the China/US trade war. So let’s talk about that.

If the Chinese government imposes tariffs on Boeing aircraft, it is Chinese airlines that are going to have to pay the higher price. This will affect profitability of Chinese airlines or those costs will be passed on to the Chinese passengers.
If a Chinese airline cancels it’s orders as a protest to the trade war, then it loses its spot in the 5 year line up for aircraft. More simply if an airline has a scheduled aircraft delivery two years out and steps out of the queue, once the trade war is done and they want those aircraft, they have to go to the back of the five year lineup. There are lots of customers waiting to take their place.
If a Chinese airline wants to change to airbus, there are regulatory requirements, operational systems changes, maintenance changes and crew training costs. It costs between $30-$50,000 to train each crew member on an airliner.

The more the ramifications of tariffs are understood, the better the threat can be recognized.

What does that mean at MONEYWISEHQ?

With $550B of production sold out over the next 5 years and a xx% dividend, Boeing is a long term investment worth considering, but not just at any price, there are plenty of opportunities to build positions on headline related pullbacks. Those same pullbacks also provide the opportunity to increase returns by using the Trading around a core position strategy in a high quality stock supported by a strong investment thesis.