Boeing (NYSE: BA ) has made a lot of headlines recently, mostly regarding its unfortunate months of mishaps surrounding its 787. Between grounding issues, battery problems, and cost overruns, it's been ugly. Investors seemed to have shrugged off these headlines and Boeing's stock has managed to rise over 30% year to date. Boeing predicts demand of commercial aircraft to reach 34,000 units over the next 20 years as the global fleets double in size. That's about $4.5 trillion up for grabs, leaving a potentially bright future for Boeing. Here are a couple reasons to be bullish for Boeing stock, and why to consider putting it on your watch list.
The biggest bear case recently has been that the government defense cuts will severely effect Boeing's "Defense, Space & Security" unit, which brings in roughly 40% of the company's revenues. While the cuts of up to $1 trillion implemented across the next nine years will no doubt have an adverse effect, there are reasons that suggest Boeing will prevail.
One recent reason is that Boeing won the U.S. Air Force refueling tanker contract that will replace 179 of the 400 KC-135 tankers. Initially the payoff will be smaller, as the first 18 are worth only $3.5 billion and will be delivered over the next four years. Then as production ramps up and the rest of the 179 tankers are finished it should bring in about $35 billion for Boeing. What's more, it could give Boeing an edge if the rest of the 400 tankers are to be replaced in the future – worth a grand total of $75 billion.
Even with defense cuts, look for Boeing to still bring in plenty of revenue. Furthermore, in case defense cuts do indeed hurt Boeing more than anticipated, the company has a trick up its sleeve.
A second reason to absolutely love Boeing stock right now is its massive backlog of orders. It's sitting on a $392 billion backlog; it has more customers and orders than it knows what to do with right now! The backlog is worth roughly 4.5 times its sales estimate for this entire year, and offers protection against economic downturns as well as worse than expected defense cuts.
Share buyback programs have their pros and cons, but generally if the company considers itself a buy, then I view it as favorable. Recently Boeing announced that it was going to return about 80% of its free cash flow to shareholders via buybacks as well as dividends. Its buyback program is expected to be between $1.5 billion and $2.0 billion this year, according to Boeing. In December 2012, its quarterly dividend was boosted by 10% to 48.5 cents a share. This isn't anything new for long time Boeing investors; the company has a long history of steadily increasing its dividends dating all the way back from 2000.
Ultimately it comes down to this, invest in a company at a decent price that has a sustainable profitable future – I believe Boeing is such a company. The defense cuts should be outweighed by the global increase of commercial aircraft business and we can't rule out that Boeing could produce innovative aircraft that would even allow Boeing to increase its market share in the defense sector – only time will tell.
One thing is for sure, Boeing has its foot in the door with the tanker program and has a massive backlog to protect profits from downturns. Management has work to do to improve margins, and investors should keep an eye on their progress – but there are many reasons to love Boeing stock.
Boeing operates as a major player in a multi-trillion-dollar market in which the opportunities and responsibilities are absolutely massive. However, emerging competitors and the company's execution problems have investors wondering whether Boeing will live up to its shareholder responsibilities. In our premium research report on the company, two of The Motley Fool's best minds on industrials have collaborated to provide investors with the key, must-know issues surrounding Boeing. They'll be updating the report as key news hits, so don't miss out – simply click here now to claim your copy today.