Source: Boeing.

In 2013, Boeing (NYSE:BA) was the best performer in the Dow Jones Industrials (DJINDICES:^DJI), climbing almost 85% and showing the strength of the commercial aerospace industry. Yet even though strong demand for aircraft hasn't shown any signs of waning, Boeing stock hasn't come close to repeating its impressive performance from last year, as the share price has actually fallen about 4% so far in 2014 even as the Dow has hit new highs.

Long-term investors know better than to worry too much about single-year performance, as good results in one year and bad results in the next often cancel each other out. Yet with so many other stocks in the Dow setting new record highs, Boeing shareholders want to know what's holding back the aerospace giant. Let's take a quick look at Boeing's fundamentals to see if they hold any clues to why the stock has fallen flat in 2014.

Boeing stats

2014 YTD Return


Expected 2014 Revenue Growth


Expected 2014 EPS Growth


Dividend Yield


Source: Yahoo! Finance.

When big sales don't produce big profits
Boeing's recent experience is a cautionary tale for investors to remember that just because a business looks healthy on the surface doesn't necessarily mean that it will make a good investment. In Boeing's case, the most difficult things to reconcile are the strength of its long-term prospects and the lack of immediate profit growth.


Boeing 777. Source: Boeing.

No one disputes Boeing's golden opportunity to take advantage of the airline industry's hunger for new planes. For decades, airlines struggled at the brink of bankruptcy, making it difficult to finance huge capital expenditures to update their fleets. But in recent years, a flood of cash flow from baggage fees and other ancillary add-on charges for passengers has given airlines the cushion they need to afford long-term investment in their businesses, and that has included big-ticket orders for newer, more fuel-efficient aircraft from Boeing and its competitors.

The huge demand for airplanes has only grown lately. Last month, Emirates confirmed its $56 billion deal to buy 150 777X jets from Boeing after cancelling a $21 billion order with Boeing rival Airbus the month before. With the Farnborough International Air Show adding tens of billions of dollars more in orders from airlines and aircraft-leasing companies, Boeing's popularity has never been higher.

Yet many investors don't understand Boeing's sophisticated accounting methods, which lead to the company deferring a lot of its revenue and costs over time. Specifically, when Boeing creates a new aircraft program, the company incurs huge amounts of costs, but the company capitalizes many of those costs rather than taking them as a current hit to earnings. Later on, as Boeing builds and delivers aircraft, it recognizes a portion of those costs, reducing future earnings to match up when it recognizes its revenue from meeting its order commitments.

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Source: Boeing.

Failing to understand Boeing's accounting can surprise many investors when the aerospace giant announces results. For instance, last month, Boeing's second-quarter earnings report was able to beat investors' expectations for earnings per share, but its revenue fell short. Even though customers continue to have confidence in Boeing by placing orders, the company's ability to deliver on those orders remains of paramount importance -- and issues like production delays have held Boeing back.

The competitive threat
The other side of the issue is that Airbus hasn't given up on claiming its share of the multi-trillion-dollar commercial aircraft industry. Boeing's main rival expects to start delivering its A350 aircraft by the end of the year, and that will pose a direct threat to Boeing's 777 and 787 models. With almost 750 orders for the aircraft, Airbus has at least as much at stake in a successful launch as Boeing has had with its recent new models.

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The Airbus A350. Source: Airbus.

In addition, Boeing's efforts to remain competitive sometimes come at the expense of profitability. Especially on the military side of the business, competition to win defense contracts can force Boeing to cut its projected margins to the bone, and if unexpected problems come up, they can turn a profitable project into a loss leader for Boeing.

Think long-term
For the most part, though, investors need to recognize that Boeing's long-term stock performance has been solid. With double-digit percentage annual gains stretching back for decades, Boeing has made shareholders very happy over the long run. From that perspective, a tiny loss over eight months of a year -- especially following such an impressive 2013 -- is nothing to worry about, and indeed, the pause could give long-term investors a better entry point to consider adding the stock to their portfolios.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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