Boeing: Big, Safe, and Under-Appreciated

09/30/2013 8:00 am EST


Timothy Lutts

Publisher, Cabot Heritage Corporation

The odds are, that the broad market has topped and that it will be increasingly difficult to make money as the weeks go by. As such, for our latest featured stock, I looked for a lower-risk issue that still has substantial upside potential, says Timothy Lutts of Cabot Stock of the Month.

Boeing (BA) needs no introduction. It's the biggest manufacturer of airplanes in America, with annual revenues of $83 billion.

60% of its revenue comes from commercial aircraft, 20% from military aircraft, and the rest from a combination of network and space systems, as well as various support services.

I can't say it's a monopoly, but there's a serious argument to be made for it being part of a duopoly with European Airbus. If you want big planes, there's nowhere else to go.

The biggest story at Boeing in recent years has been the development of the 787 Dreamliner. A revolutionary plane that boasts 80% carbon fiber composite construction, it uses 20% less fuel than the 787 it replaces, a fact that is extremely attractive to its customers.

The first orders were received in 2004, but because of many potholes during development and production, deliveries didn't ramp up until last year; revenues from these planes are just now ramping up.

Plus, Boeing just received an $11 billion order for its new 777X, a plane that hasn't even been approved by the board of directors, and is likely to be delivered in 2019.

Also, the company is close to capturing new fighter jet orders for South Korea, and it's expanding its Montana manufacturing facility to meet demand for the Dreamliner and other commercial aircraft.

On the revenue side, Boeing is generally a growth company, but it saw shrinkage in both 2008 (the economy) and 2010 (customers waiting for the new Dreamliner).

But revenues surged 19% in 2012, and should continue to grow at a good pace for years to come. On the earnings side, analysts are looking for growth of 30% this year and 12% next year. Also, Boeing pays a tidy dividend of 1.6%.

Even bigger than sales and earnings, however, is Boeing's free cash flow, which is beginning to mushroom and, according to one analyst, could reach a whopping $15 per share by 2015.

And management has said it's aiming to return 80% of its free cash flow (via dividends and buybacks) to shareholders! Steadily rising payouts should continue to keep big investors interested—in fact, it already is!

The stock first hit $76 in April 2010, and over the next three years, it made five major attempts to breakout above this level; each one failed.

The stock made a sixth attempt this March, and this time, the breakout worked! And that's great news because technical analysis tells us, the longer the base, the longer the run.

After that April breakout, BA climbed merrily higher, but without much fanfare. It then built a shorter base—a pause really, centered on $105—in July and August.

And that led to the breakout of two weeks ago, as the good news about Boeing spread and institutional investors began to ratchet up their positions.

Overall, Boeing is big, safe, and under-appreciated. I think BA has a lot more upside in the months—perhaps years—ahead, as the global economy continues to expand and perceptions of the company's business drive more and more investors into BA.

Short-term, the stock is now pulling back from its recent high of $120, and is very likely to find support at or above $113. If you want to fine-tune your purchase, you could wait for this correction to bottom. I'll keep it simple and buy.

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