One of the market's highest-flying companies has been grounded in 2014.
Aerospace colossus Boeing (BA 0.66%) posted a strong 2013 alongside the market's rise. However, 2014 has seen the stock drop 7.2% all the way to the bottom of the Dow Jones Industrial Average (^DJI -0.47%). For shareholders, the success of the commercial aerospace market hasn't translated to rewards this year.
Can the Dow's worst year-to-date performer stage a comeback? Boeing faces challenges from defense spending and Capitol Hill, but all eyes remain on the huge potential facing this aerospace giant.
Clear skies ahead in commercial aviation
If the commercial aerospace market is any indicator, Boeing's long-term future couldn't look brighter. Consulting firm PwC estimates world demand for commercial aircraft between 2013 and 2033 at more than 35,000 planes, a value in excess of $4.8 trillion. That's a huge opportunity for Boeing and top rival Airbus (EADSY 0.27%), particularly as aerospace markets in developing economies grow.
Boeing has certainly made the most of its opportunity so far. The company's backlog has swelled to record levels and pushed forward production of its thriving 787 Dreamliner as of late. That helped the business post a 7% increase in deliveries in the second quarter, with the Dreamliner leading the way. This is also translating into more than just sales: Boeing increased the operating margin in its commercial aerospace unit by four-tenths of a percentage point in its most recent quarter, and keeping that profitability climbing will only afford the business more leverage to push its reliable 2.2% dividend higher.
Boeing estimates more than $1.8 trillion in new aircraft will be needed in the Asia-Pacific region alone from 2013 to 2032, with China a main driver behind that growth. Don't count out U.S. demand, either: The Federal Aviation Administration estimates that commercial carriers in the U.S. will ferry more than 1.1 billion passengers in 2033, an increase of more than 75% from 2012's total. Boeing projects 5% annualized cargo traffic growth as well through 2032, giving the company plenty of options to continue reaping the rewards of an industry ready to boom. That's sweet music to the ears of investors who keep their eyes open for long-term trends.
Of course, competition is always a factor. Airbus remains a potent rival, even if the European aerospace giant posted delivery growth of 2.7% in the first half of 2014 that paled in comparison to Boeing's recent run. Surprisingly, China has yet to pose a serious challenge to Airbus and Boeing in this market, despite investing billions of dollars into this area. While the Commercial Aviation Corporation of China has made limited progress in developing the country's own commercial aviation market, Boeing and Airbus have the opportunity now to establish dominant footholds in this budding economic powerhouse.
Don't expect Beijing to let up on plans for a domestic challenger, but China's own commercial aerospace manufacturers remain works in progress.
The air's free of turbulence for Boeing in the long term for commercial aerospace dominance. But can pressures in the defense sector -- and recent developments in Washington -- hinder the company's future?
Storm clouds on the horizon
The defense sector is an important cog of Boeing's business, and this industry has faced heavy fire in 2014. Boeing itself saw its defense, space, and security sales fall by nearly 6% year over year in its most recent reported quarter, while the division's contractual backlog tumbled by nearly 2%. Even worse, the company's operating margin for its military aircraft unit fell by more than a full percentage point, year over year.
The pressure is on rivals as well, heating up an already competitive industry. Lockheed Martin (LMT -0.49%) saw its total sales decline by nearly 4% in its most recent quarter in light of falling defense spending. While Lockheed has kept its operating margin running higher, the company's reliance on the Department of Defense looks troubling in the near term.
The bleak picture might not improve anytime soon. The Pentagon projects $495 billion in spending next year, down nearly 24% from 2012's defense spending. Accounting firm Deloitte projects more pressure and falling sales across the industry as the U.S. budget declines. Although defense spending has risen in markets such as China and the Middle East, the Pentagon is still responsible for the bread and butter of the market's top military contractors.
Another looming threat from Washington could be approaching. Congress has stalemated over reauthorizing the Export-Import Bank, a federal institution that provides loan guarantees and other financing options to help U.S. exporters. According to ratings agency Standard and Poor's, Boeing reaps the largest share of the bank's benefits, and shutting down the institution could force the aerospace manufacturer to drum up between $7 billion and $9 billion in customer financing.
That's not likely to affect Boeing considerably in the immediate sense, but in the long term it could be a huge hindrance to the company -- particularly on a competitive field. Airbus receives its own financing aid from European institutions, and Boeing could find itself fighting an uphill battle to maintain leadership in this industry if Congress fails to reauthorize the Export-Import Bank.
It's still under heavy debate on Capitol Hill, but for Boeing investors, this issue demands close attention.
Sticking it out for the long term
The defense industry's sluggishness and the debate over the Export-Import Bank add uncertainty to Boeing's long-term future, but one thing's clear: The commercial aerospace industry is brimming with potential, and Boeing is in prime position to capitalize on it. While Airbus will remain a formidable obstacle, Boeing's success with the 787 Dreamliner and its skyrocketing backlog of commercial aircraft orders have this stock on course for years of success despite the bumpy ride in 2014. Over the next 20 years, the Dow's worst member through the first half of the year could end up one of its biggest winners.