I’ve flown all over the world in all kinds of jetliners, and usually when the plane gets going, I tune out the safety presentation.
Been there, done that.
But on a recent Southwest Airlines (NYSE: LUV) flight from Money Map Press headquarters in Baltimore to Oakland International Airport, I listened carefully as the flight attendant described the plane’s safety features.
Just two days before, a woman died on a Dallas-bound Southwest flight after an engine failed and she was nearly sucked out of the cabin.
At a time like this, many investors might shy away from The Boeing Co. (NYSE: BA), which made the ill-fated 737 aircraft in question.
But today, I’m going to show you why that would be a big mistake…
A Rare Tragedy
Let me be clear. I’m not making light of what happened. This was a horrible incident, and Jennifer Riordan’s family and community are still in mourning.
However, it bears noting that flying in the U.S. remains incredibly safe. Riordan was the first passenger to die on a major U.S. airliner since 2009, and the first ever in the 47 years that Southwest has been flying.
Now then, the reason I paid so much attention to the safety briefing has to do with a message I got from my wife before boarding. She linked me to a photo taken by a passenger that shows folks on that ill-fated flight putting their safety masks on incorrectly.
So, I put my smartphone and tablet down to make sure I knew exactly what to do, should there be an emergency.
I have to say that, overall, the media provided a pretty fair account of Southwest’s, as well as Boeing’s, “blame” for the incident.
However, for Boeing, the world’s leading commercial aviation firm and longtime Southwest supplier, the accident served as part of a one-two punch. Shares had earlier come under pressure earlier that week because of a possible trade war with China, where Boeing is also a major supplier.
But five days after the fatal flight, the Chicago-based titan reported record earnings that reflect a boom in commercial aviation and the growth in defense spending.
To show you why Boeing remains such a great stock for the long haul, let’s focus on the two main areas that will fuel the company’s growth for years to come.
Starting with the massive upside it faces in passenger flights…
Meeting Demand in the Crowded Skies
Every summer, Boeing releases an updated view of the long-term demand for its aircraft. That report comes after deep discussions with key clients and a thorough analysis of economic trends.
And the most recent report was a blockbuster. Boeing says that 41,030 planes, worth $6.1 trillion, will needed to be built over the next two decades to meet demand.
While North American skies will need 8,640 new planes, we’re also looking at 16,050 new planes set to hit the Asian market over the next 20 years.
In fact, miles flown by today’s fleet has been rising by an average 6.2% over the past five years. And there’s no reason to expect a sharp slowdown in that trend any time soon.
Here again, Asia is a key driver. And it’s all about rising incomes.
According to UBS, output per worker in Asia (excluding Japan) is less than $20,000. That compares to output per worker of more than $100,000 in the United States and Europe.
But as folks in Asia see their productivity and incomes grow, the amount of funds available for air travel will grow at a rapid clip.
Strong long-term demand for aircraft brings up a pair of key points.
- Boeing is able to keep its massive factories humming with a large and steady backlog. That’s a very profitable way to operate.
- With a large backlog in hand, Boeing has little incentive to pursue discounted pricing.
And the pricing on these planes is impressive. For example, Boeing sees demand for 29,350 new single-aisle planes, which have an average price tag of $109.5 million.
As for the 3,160 medium and large planes in the production pipeline, such as the Boeing 787 Dreamliner, pricing per plane soars to $367 million.
And don’t forget that nearly 1,000 new air freighters will be added to fleets in coming years to handle the surge in global trade.
A Defense Juggernaut
Meantime, Boeing ranks as one of the Pentagon’s top suppliers. And that means it stands to cleanup under President Donald Trump’s plan to beef up the nation’s fighting forces.
As we recently discussed, Trump wants to upgrade the military from stem to stern with more troops, tanks, ships, and aircraft.
The Boeing Defense, Space & Security (BDSS) division is a leading provider of jet fighters, helicopters, and, more recently, airborne drones. This division has brought in $70 billion in sales over the past five years.
Boeing’s AH-64 Apache, for example, is the world’s most advanced multirole combat helicopter. The U.S. Army, and a range of foreign militaries, have logged millions of hours of flight time on more than 2,200 Apaches.
The Boeing B-52 long-range bomber, despite having roots going back to the 1950s, has been kept modernized – and is still the first choice for many tough missions.
Its F/A 18 Super Hornets can fly at supersonic speeds and still land on the short platform of an aircraft carrier.
And Boeing ranks as a major supplier of missile defense, surveillance craft, and unmanned aerial vehicles (UAVs). That last category promises to become a strong new growth area for Boeing.
The October 2017 purchase of Aurora Flights Sciences Corp. is a beachhead for Boeing’s drone efforts. That firm has already garnered industry buzz for its autonomous systems that allow military and commercial aircraft to be flown remotely.
Boeing’s new “Equalizer” is another foray into UAVs. This drone, known as the MQ-25 Stingray, will take off from aircraft carriers and allow U.S. Navy fighter bombers to fly longer reconnaissance and strike missions.
Boeing is also making a push into “cargo air vehicles.” They could make the promise of a rapid, direct package delivery vehicle a reality in just a few years.
This firm is looking to expand into any area of aircraft that can expand its sales window. For example, at the end of April, Boeing said that it will buy plane-parts specialist KLX Inc. (Nasdaq: KLXI), which will boost its presence in the lucrative aircraft-servicing business.
With so many great platforms, it’s no wonder Boeing had a blowout first quarter.
Earnings of $3.64 a share were far ahead of the $2.58-per-share estimate. Almost all of the profit upside comes from sharp efficiency improvements in Boeing’s factories.
More impressive, Boeing says it has $462 billion in orders in its backlog. That is the biggest backlog of any firm in the world.
As a result, Boeing is on pace to generate at least $14 billion in adjusted earnings this year, which is helping to fuel a $15 billion share buyback program.
Have a great week.
— Michael A. Robinson
Source: Strategic Tech Investor