2 Solid Arguments for Boeing
Jan 14th 2013 9:28PM
Updated Jan 15th 2013 6:50AM
With the concerns over sequestration cuts delayed, though certainly not solved, two recent announcements by Boeing demonstrate why the sometime defense contractor stands above many of its industry peers.
Since the calendar rolled over, the U.S. Navy reported that it would be adding $1.4 billion to a contract to Bell-Boeing for 22 V-22 Ospreys; the government contract was awarded to a joint venture between Boeing and Textron's Bell helicopter division. Almost simultaneously, the aircraft manufacturer announced that Aviation Capital Group's order for 60 737 MAX airplanes pushed total orders to date to more than 1,000.
These two pieces of news highlight Boeing's diversification outside of defense contracting and give it a major advantage over its peers. Based on the strength of these catalysts, and in spite of the reality that sequestration is far from solved, the stock is a buy at current levels.
Starting last summer, defense industry watchers began to speculate as to which companies would be most heavily affected if the sequestration cuts that were an integral part of the fiscal cliff went into place. Sequestration refers to mandatory cuts that were created as a sort of punishment if Congress could not preemptively agree to acceptable cuts. When Congress was unable to manage the self-imposed task, the cuts became a part of the fiscal cliff package. Despite the fact that a last-minute deal was reached, the sequestration issue remains on the horizon, having been pushed back until the end of February.
Like many defense contractors, Boeing was concerned when an OMB report listed many critical defense projects as part of the sequestration mess. Included on the list was the company's KC-46A midair refueling tanker that had backed the $35 billion contract won in 2011. While specifics of the cuts were left vague, Boeing joined such peers as Lockheed Martin and General Dynamics in voicing concerns over lost income.
The early January announcement that the Navy was adding the $1.4 billion to the contract includes fiscal 2013 funding, a critical piece of news ahead of the new sequester deadline. The issue has created ongoing concerns to shareholders and employees alike. Last October, Lockheed issued a memo to employees promising not to impose sequestration layoffs last year, but little indication has been given since as to how this will play out with the new deadline.
Similarly, last September, Fool Dan Carroll warned that General Dynamics was going to be the "big loser" under the cuts. The company's focus on large, capital-intensive projects -- not like the Ospreys -- would likely be one of the harder-hit areas under the cuts. These projects remain in jeopardy. The fact that Boeing, and similarly Textron, has received such overt support is a very positive sign if you are a shareholder.
The civilian contingent
In addition to the positive news from the Navy, Boeing also has been selling its 737 MAX line of airplanes in large quantities. The new line represents the most fuel-efficient and environmentally friendly aircrafts on the market today. Jon Wojick, Boeing's senior vice president of global sales, said, "The 737 MAX will deliver to ACG's customers unsurpassed efficiency in the single-aisle market as well as improved environmental performance." The company reached the milestone number of sales in just over a year and is showing no signs of slowing.
The news comes at a critical time for the company that has faced a variety of issues. It recently bettered its offer to its engineering union under significant pressure to avoid costly delays. Amongst other details, it is now offering professional workers a 5% pay raise for two years and then 4% for the remaining two in the four-year contract.
Additionally, the FAA announced last Friday that it would be performing a comprehensive review of the 787 Dreamliner after a series of incidents. Officials were careful to comment that the planes were safe, as many are already in the skies, but the review will commence all the same. Despite these warnings, the company has taken orders for 848 aircraft already. By all measures, Boeing's commercial aircraft business is going strong.
The balancing act
What each of the above details illustrates is that Boeing is firing on all cylinders. On the defense side, it appears to have dodged the sequestration bullet, at least for the time being. What is perhaps more important, however, is the fact that the company's commercial aircraft business is producing big numbers. Where peers such as Lockheed and General Dynamics do not have this level of diversification, Boeing is able to well insulate itself on many fronts. As such, I believe these arguments support buying Boeing at current levels.
With great opportunity comes great responsibility. For Boeing, which operates as a major player in a multi-trillion dollar market, the opportunity is absolutely massive. However, the company's execution problems and emerging competitors have investors wondering whether Boeing will live up to its shareholder responsibilities. In this premium research report, two of the Fool's best industrial industry minds have collaborated to provide investors with the key, must-know issues around Boeing. They'll be updating the report as key news hits, so make sure to claim a copy today by clicking here now.
The article 2 Solid Arguments for Boeing originally appeared on Fool.com.Doug Ehrman has no position in any stocks mentioned. The Motley Fool owns shares of General Dynamics, Lockheed Martin, and Textron. 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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