Aircraft Maker Has Long Runway for Growth

Shares of Boeing have been a downtrend, falling some 10% since its February high, on concerns over waning demand especially the jumbo 777 and the negative impact of the strong dollar. But news from the Paris Airshow suggests the company’s stock could take off in coming months.

The aircraft manufacturing industry is basically a duopoly between Boeing (BA) and Airbus with each having nearly equal market share when measured by number of aircrafts built and delivered. And while they do view each other as competitors, it was mostly for headline bragging rights. Due to politics, the airline industry is highly regulated and outside the U.S. many carriers and contractors being partially government owned, defense/military make up 30% of sales and Boeing and Airbus rarely truly competed head to head except for a few swing customers Boeing mostly served North America and Airbus Europe.

But that has started to change over past few years. The most visible front is on the super jumbo jets with Boeing’s 777 going head-to-head with Airbus’s A350 both launched in 2013. More importantly they are now competing fiercely for customers in the emerging markets across Asia and South America. It is in these regions that will drive growth over the next decade.

Best in Show

After second day the Paris Airshow, the annual event makers show their wares to prospective buyers, it appears Boeing is winning on both fronts. Thus far Boeing orders and commitments reached $29.6 billion, nearly double Airbus’s $16.2 billion recorded.

Boeing Co. pulled in the biggest deal so far, a $10.7 billion order from AerCap Holdings NV for 100 of its single aisle 737. The deal was a big win not just for its size but was the first time Aercap, a Netherlands-based lessor, purchased from Boeing. It previously bought Airbus’s rival A320neo craft.

The 737 family of airplanes is witnessing a sharp rise in demand in the commercial aircraft market, primarily in China, India, the Middle East and Africa, and other emerging countries due to the growing popularity of the low-cost carrier business. Air travel within and between emerging regions is has been growing by 11% over the past five years and is expected to continue on that pace for the next decade.

Emerging Winner

Boeing has been scoring some big wins especially in China. In March Air China affiliate – Shenzhen Airlines – for 46 737 planes, as per media reports. The deal for these single-aisle jets is valued at $4.3 billion at list prices. Last month Boeing nabbed a $6.1 billion order from a Chinese consortium for its single-aisle 737 Max jets. Chinese carrier Ruili Airlines and two leasing companies − have signed a deal with the aerospace behemoth for 60 narrow-bodied 737 Max models. Boeing had earlier predicted that China will eventually beat North America as the biggest air-travel market in the next two decades. Commercial airplane demand on the whole is expected to surge owing to rising passenger traffic in Asia-Pacific.

As you can see Boeing has already dominated the short haul/smaller plane market.

BA v Airbus image

It is the regional travel inter-city travel within emerging market that is driving most of the industry’s growth.

Jumbo Demand Shrunk Less

Some of the recent weakness in Boeing’s shares can be attributed to a slowdown in demand for its Jumbo 777.   Given the capital intensive nature and time needed to build such planes production schedules are laid out for years in advance. Boing had been anticipating 80-100 orders per year through 2020.   At the end of 2014 orders for 777’s dropped to a 50 per year pace.   While it still has a backlog if nothing changed Boeing would have to cut production from about 10 per month down to 5 month by 2017. That’s an expensive position to adjust it’s supply and labor chain and of course would lead to reduced revenues.

But recent orders from emerging-market carriers at the Airshow, including PT Garuda Indonesia, Saudi Arabian Airlines and Qatar Airways Ltd. went the long-haul wide body jets were an encouraging sign.  Boeing has also offered more incentives and discounts to entice existing customers such as U.S. carriers that had been waiting for the upgraded 777 X model set to roll out in 2020. Analysts now expect production may only need to be cut by 2 down to 8 planes per month staring in 2017.

With strong sales in emerging markets and better visibility for its wide bodies Boeing’s share price should stabilize near the $140 level as investors can once again have confidence in its long term growth prospects.

BA 061615

The Trade:

I’m targeting a purchase of LEAP calls. Specifically;

Buy the January $140 calls @ $8.50 a contract

Note, it will likely take shares of Boeing trading below $142 for this order to be executed at the price limit. Be patient, this trade has a long runway and will need time to play out. The options we are buying don’t expire until January 20th 2016.

— Steve Smith

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About the Author: Steve Smith