Unless you believe that the global economy is going to slow severely in 2019, or that the U.S.-China trade dispute will lead to a marked reduction in Asian passenger traffic growth -- or both -- then Boeing (NYSE:BA) is a stock well worth buying. The company certainly has execution risk -- increasing the production rates of aircraft is never easy -- but on balance, Boeing offers investors a compelling mix of revenue growth and margin expansion. Let's consider the investment case for the stock.
A golden age of airline profitability
It's well known that the fortunes of Boeing and Airbus are tied to the vagaries of the commercial aviation cycle, which in turn largely depends on the economy. Therefore, as noted above, if you have concerns about a global growth slowdown, you'll probably feel that Boeing is a stock to be avoided.
That said, if you are blase about those potential macro risks, then you should have a favorable outlook for the stock. For example, as the chart below reveals, the long-maligned airline industry is in the middle of a period of profitability and efficiency like it has never seen before.
Compare the four years prior to the Great Recession to the past four years and the huge improvement in airline profitability jumps out. This bodes well for future orders of Boeing and Airbus planes, and as increased production generally leads to lower unit production costs, it suggests the profit margins on many of Boeing's aircraft programs are likely to go up.
Margin expansion opportunity
Boeing's management believes it can make progress toward an operating margin in the mid-teen percentages at Boeing Commercial Airplanes (BCA) within the next couple of years, compared to a guidance range of 12% to 12.5% for 2018. As the pie chart below illustrates, BCA is the powerhouse of the company's operations; even a couple of added percentage points of margin there would have a significant impact on earnings.
In addition, BCA's margin expansion is applicable over the long-term becomes it will derive from structural shifts rather than just from cutting unit costs as production rises. For example, Boeing's Partnership For Success (PFS) initiatives -- under which suppliers are awarded long-term contracts, in exchange for which they are obliged to cut prices -- will significantly reduce supply costs.
In addition, Boeing has been expanding its own manufacturing operations in order to claim a slice of the lucrative aftermarket parts segment. Essentially, Boeing is muscling in on its suppliers' margins, and the good news for shareholders is that this trend, too, could continue over the long term.
The industry is responding to that strategy with a wave of consolidation, as suppliers try to gain the scale that will provide them with more negotiating leverage with Boeing and Airbus. Key examples of that include United Technologies' purchase of Rockwell Collins and Safran's Zodiac Aerospace acquisition.
Don't forget wide-body aircraft
Most of the media coverage of this industry has focused on the battle between Airbus and Boeing for sales in the narrow-body aircraft market, but that could change in the next year or so. Boeing management believes that wide-body orders are set to experience a meaningful increase, propelled both by replacement demand and the forthcoming availability of new Boeing 777X.
Boeing believes sales in the wide-body market will be driven by demand for the smaller aircraft that it specializes in. If so, Boeing's aircraft orders could start to surge at the beginning of the next decade.
Increasing the production rates on the 737 and 787 aircraft represents both a risk and an opportunity for Boeing in 2019. The company certainly experienced supply chain pressures in 2018 as it increased the rate of 737 production from 47 a month in 2017 to 52 a month, but so far, it has managed to hit its targets. In 2019, Boeing plans to increase its 737 production rate to 57 a month, and boost 787 production from 12 a month to 14 a month.
Obviously, there's a risk that production could fall short of those goals, but recent news suggests that investors should feel more sanguine about Boeing's prospects on that score. For example, the long-term agreement between Boeing and 737 fuselage manufacturer Spirit AeroSystems helps to remove a lot of uncertainty around its production outlook.
Meanwhile, General Electric's management sounds confident that CFM International (a joint venture between GE and Safran) will be able to catch up on LEAP engine production in 2019. CFM's LEAP engine is the sole option on the 737MAX.
Why Boeing is a buy
Unless you are worried that the current economic deceleration in China will devolve into a protracted malaise, Boeing stock's should look attractive to you. The ramp up of 737 production does carry some risk, but Boeing appears to be further ahead on it than it was with its 2018 ramp up at this time last year.
Add in the ongoing margin expansion at BCA, its BGS market share gains, and the possibility of good news regarding future wide-body aircraft demand, and it becomes clear that Boeing will have a lot going for it in 2019 and beyond.