The first quarter is over and some results are in. The S&P 500 rose 13%. It was the best first quarter since 1998 and the best overall quarter since 2009. Now what? Boeing stock is an interesting contrarian option. More on that in a minute.
Back to the market, if this pace were to continue the market would be up over 50% in 2019. That’s highly unlikely. It was mostly a bounce-back from the oversold conditions at the end of last year. In fact, the economy is showing ominous signs of slowing down.
The economy has been slowing since it peaked at 4.2% in last year’s second quarter. Fourth-quarter GDP numbers were just revised downward to 2.2% from the 2.6% originally reported. The Federal Reserve estimates annualized GDP growth of 2.1% in 2019, down from 3% last year.
Sure, the economy is losing some steam. But it’s still a long way from recession. Historically, markets often get a strong rally at this phase of the economic cycle. While stocks won’t continue to gain 13% per quarter, the rest of the year could still be very solid. So where do you invest new money?
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The more defensive, recession resistant names like Utilities and REITs are popular in the current environment. The problem is that many of the better names are pricey here, near 52-week highs after a banner year. And there is economic risk with the cyclical companies. It’s not an easy market to find opportunity, but there is a special individual story unfolding.
Boeing Stock a Strong Contrarian Play
U.S. aircraft maker Boeing (BA) has been in the news lately, and not for good reasons. Because of two crashes of its B-737 MAX 8 planes, the planes have been grounded throughout the world pending investigations. The stock fell 18% from its high during the fallout but is now down only 12%. Could this be a buying opportunity in Boeing stock?
I believe the current issues are temporary and won’t disrupt the trajectory of the company or the stock beyond the near term. It’s also important to understand what an absolute monster this company is.
It’s a Dow Jones component and one of the largest companies in the country and the largest U.S.-based exporter by far. As primarily a commercial airplane manufacturer (it also makes military aircraft and sells parts) the company operates in a duopoly with only one competitor, Europe-based Airbus. Competition doesn’t come easily. You don’t just whip up a new mass producer of commercial jet aircrafts.
Is commercial airplane manufacturing a good market?
With a growing global middle class the demand for airplanes is exploding. Apparently, one of the first things people do when they get money is travel. The number of annual airline passengers worldwide has increased from less than 2 billion in 2004 to an estimated 4.6 billion in 2019. That’s an additional 2.6 billion passengers. The number of passengers is also forecast to double from here over the next 20 years.
They can’t make planes fast enough. It sounds like an exaggeration that people often say. But in Boeing’s case, it’s actually true. The company has an order backlog of about 5,900 commercial aircrafts, which translates to more than $490 billion in revenue. The company currently generates $101 billion in annual revenues, which represents more than four years of future business already booked. That gives Boeing tremendous earnings visibility.
Let’s look at the long-term performance of Boeing stock. Over the past 10 years, BA has returned a little over 30% per year on average. A $10,000 investment a decade ago would be worth about $130,000 now, with dividends reinvested. Over the past three years BA has returned over 43% per year on average, and that’s after the recent fall.
You would think Boeing stock would be too expensive even after the dip. But it sells at a forward price/earnings ratio of 18.87%, which is not far above the market average and in line with the five-year average. That’s a very reasonable price considering the company is expected to grow earnings by an average of 22% per year over the next five years.
Buy BA at a Discount
Boeing had a banner year in 2018, too. Revenues increased 8%, earnings were up 30% and free cash flow grew 17% to $13.6 billion. With all that done the company can invest in R&D and reward shareholders. It just bought back $9 billion worth of shares in 2018 and instituted another $20 billion stock buyback program going forward. It also raised the dividend 20% last year.
Boeing’s dividend yield is a modest 2.1%, but it grows like crazy. The payout grew at an average rate of 28.7% over the last five years. And the company still only has a 56% payout ratio. It’s true that Boeing stock will probably take a hit if we do have a recession and an accompanying bear market. But the business is unlikely to be greatly affected because of the order backlog, meaning BA stock will likely come back very quickly.
Boeing is a one-of-a-kind company and stock. There really is no bad time to buy it. The business model has a straight upward trajectory and even if a recession sneaks up on you, you can just average down your purchase price. Boeing stock is a long-term winner selling at an attractive entry point right now.
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