Why The Boeing Company Is Looking to China for Future Growth

As China increases its roll-out of budget planes, how will Boeing continue to compete in the fast-growing country?

May 12, 2014 at 9:00PM

If momentum stocks are making you sick to your stomach, it's likely time to take a break and take a look at some stable companies. Boeing (NYSE:BA) is one of those companies. Shares of Boeing have outperformed the S&P 500 index by over 100 percentage points over the last five years. There could also be more upside to come as China increases its number of budget airlines. 

What's driving China?
The Civil Aviation Administration of China, or CAAC, is planning to establish roughly 80 new airports by 2020 (including a second airport in Beijing that'll cost $14.5 billion.) China is also pushing existing airports to upgrade infrastructure to handle the growth of low-cost carriers. This is good news for both Boeing and Airbus because carriers will be looking to order new Boeing 737 MAX jets and Airbus A320 aircraft.

In 2013, around 25% of the Chinese population travelled by air. That number is set to increase and may even involve almost the entire population traveling by air in 20 years. During this same period, China is expected to replace the U.S. as the largest civil aviation market in the world. There are bound to be many new entrants, and there is no reason that the low-cost-carrier model for short-haul travel that has been successful throughout the world would not be successful in China. 

The only existing low-cost carrier in China, Shanghai-based Spring Airlines, has been in existence for years and still has a problem in obtaining prime landing slots at Beijing International Airport. Consequently, it has run up losses of $12 million on a route where the other carriers are showing a profit.

Beijing, which is arguably the busiest airport in China, is the base for Air China and a crucial hub for the other state-controlled airlines. The CAAC has recently promised to allot slots to all the airlines in a fairer and more transparent fashion. Spring booked about 5% of the passengers in the overall Chinese market (compare that to all of Europe, where low-cost carriers have about half of the short-haul market).

The latest Chinese order
Shandong Airlines has announced that it has placed an order with Boeing for 50 737 aircraft valued at about $4.6 billion at list prices. Boeing confirmed the order but refused to confirm the number of aircraft, as Chinese government approval is still required. A growing number of airlines throughout the world are seeking more fuel-efficient aircraft, and the 100- to 200-seat, single-aisle-aircraft market is expected to be worth $20 trillion over the next two decades. 

This market is currently dominated by the Boeing 737 and the Airbus A320. If the Shandong Airlines order goes through, it will represent a big win for Boeing, not only with respect to competitor Airbus, but also compared to the Chinese state-owned Commercial Aircraft Corporation of China, which aims at the same market segment with its C919 plane, for which it already has more than 400 orders, mostly within China.

The domestic Chinese aircraft industry
A report from the Rand Corporation expresses the opinion that China should exit the aircraft manufacturing industry because it is so far behind Boeing and Airbus and continues to lose ground. The report says that China is wasting money, including the $7 billion that it has already spent developing the C919. 

The main problem being that by the time the C919 is ready for the market, it is likely to be an entire generation behind the Boeing 737MAX and the Airbus A320neo with which it will compete. This could well leave it in competition with used aircraft instead of the new ones. It has also spent a lot of money on developing the regional jet, the ARJ-21. The report says that it is extremely unlikely that either Chinese aircraft is going to be commercially successful.

Stacking up the competition
On the other end of the market, Boeing is still a major contractor for the Department of Defense. This means that it competes with Lockheed Martin (NYSE:LMT), the world's leading defense contractor. Lockheed Martin announced a record order backlog at the end of the first quarter. This is a big positive development considering the issues from budget sequestration.

With the budget sequestration issue tabled for now, Lockheed Martin should see continued demand for its fighter jets. With this, Lockheed has been returning cash to shareholders nicely. It spent over $1 billion in the March-ended quarter on share repurchases.

Embraer SA (NYSE:ERJ) is another major aircraft manufacturer that is also looking to gain a larger presence in the Chinese airline market. Embraer is Brazil's leading aircraft manufacturer. China is second to the U.S. when it comes to the largest fleet of Embraer commercial aircraft, but Embraer's second-generation E-Jets aren't set to be delivered until 2018. Once they are delivered, they'll provide a near 20% improvement in fuel economy compared to first-generation E-Jets.

Boeing's stock trades at the highest P/E ratio of the three companies, at 22, while Embraer trades at a 20 P/E, and Lockheed Martin trades at 18. Not only is Lockheed Martin trading at the lowest P/E, it also pays the highest dividend yield at 3.3%. Embraer offers a 2% dividend yield, while Boeing offers 2.3%. It is worth noting that Boeing's 61% is the lowest debt-to-equity ratio of all three companies. Embraer's debt-to-equity ratio is 71%, and Lockheed Martin's is 125%.

Bottom line
The growth in the commercial airliner business, and an improved environment for defense spending in the U.S., are key drivers for Boeing. The growth in its order book is a another positive sign. There are also the developments in China that only add to the fact that Boeing is becoming a growth story. For investors looking to gain exposure to the aerospace and defense sector, Boeing is worth a closer look. 

OPEC is absolutely terrified of this game-changer
Imagine a company that rents a very specific and valuable piece of machinery for $41,000… per hour (that’s almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company’s can’t-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we’re calling OPEC’s worst nightmare. Just click HERE to uncover the name of this industry-leading stock… and join Buffett in his quest for a veritable LANDSLIDE of profits!

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Embraer-Empresa Brasileira. The Motley Fool owns shares of Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information