Although not yet officially declared, there was anecdotal evidence from three bell-wether consumer stocks last week indicating that the US is in recession. Starbucks said “the environment is the weakest in our history”; white goods maker Whirlpool reported the “most severe appliance market in over three decades”; and Black & Decker described conditions as “very difficult”. The message was that waning demand and rising costs are squeezing profit margins.
Boeing Inc (NYSE:BA), rated as OVERWEIGHT by Morgan Stanley
So this week’s tips side-step stocks reliant on discretionary spending (such as hotels and leisure), and instead focus on less-cyclical themes or consumer staples (such as food). One such long-term growth story is Boeing. It is the world’s largest manufacturer of commercial and military aircraft as well as being a top provider of defence and space systems. It is based in Chicago and services about half the market for 100-plus seater planes, with the other half going to European rival Airbus.
But this equal weighting may soon shift in Boeing’s favour. It seems to be one of the few beneficiaries of the sub-prime crisis. After a period of cheap credit followed by lower US interest rates, the dollar has fallen around 30% against the euro since January 2006. This has handed Boeing a huge cost advantage over Airbus, which is being forced to hike prices to offset spiralling losses.
Industry fundamentals look attractive. Analysts predict that over the next 20 years passenger and freight traffic will climb on average by 4.9% and 5.8% a year respectively. With oil at record levels and environmental fears growing, many carriers are being forced to replace older aircraft with more efficient planes.
These trends of greater mobility, better fuel consumption and lower pollution are expected to mean the global fleet grows from 14,980 in 2006 to 32,783 by 2026. At the same time, 6,459 aircraft will be retired, equating to an aggregate demand of 24,262 new aircraft, worth around $2.8 trillion at 2007 list prices.
Boeing’s first-quarter numbers beat Wall Street hopes soundly, with revenues up 4% at $16bn and operating profit margins rising to 11.3% from 8.5% since the first quarter of 2007. The board also reaffirmed its earnings per share guidance of $5.70-$5.85 a share in 2008, rising 20% to $6.80-$7.00 in 2009, putting the stock on corresponding p/e ratios of 14.7 and 12.3. This earnings visibility is underpinned by a record $346bn order book, equal to more than five years’ sales, and is based on known production volumes of 480 aircraft in 2008, lifting to 500 in 2009.
Deliveries are also set to rise further in 2010. Chief executive Jim McNerney said: “Demand globally remains strong and is being aided by high fuel prices and environmental concerns.” Although the group warned that the US economic situation was becoming “more tenuous”, it added that “if there is a more significant downturn, then Boeing is in a good position to weather it”.
Of course there are concerns, not least the problems with the development of its new Dreamliner 787 model. This 250-300 seat jet, whose light carbon-fibre frame will make it 20% more fuel-efficient than existing models, has won orders for a total of 892 planes worth some $145bn. But the project has been dogged by delays, chiefly involving production difficulties among the myriad suppliers building parts to be shipped to Seattle for final assembly.
There are also the usual sector risks of customer defaults, order deferrals, safety, terrorist or other scares, currency fluctuations and possible defence cuts after the US election. But with such a dominant position in a growing market and a strong balance sheet (net funds of $3.9bn), the stock looks good value.
Recommendation: BUY at $85.90
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments