Share tip of the week: Unloved stock will really take off

By Paul Hill Nov 06, 2009

Paul Hill

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Boeing, the Goliath of the aerospace industry, is an unloved turnaround stock that offers substantial upside to patient investors.

It is the world's largest manufacturer of commercial and military aircraft, as well as being a leading provider of defence and space systems. For example, it services around half of the market for 100-plus seater planes (the other 50% is taken by European rival Airbus) and is Nasa's largest contractor.

The main reason for the stock's sharp descent has been fears that the company will suffer mass order cancellations as airlines go out of business.

Yet what matters more than the odd lost contract is the fact that the firm still enjoys a $320bn order backlog, equivalent to nearly five times revenues. Boeing has generated a net 84 new aircraft orders in 2009, with 79 of these signed in the third quarter alone.

Boeing (NYSE: BA), rated a BUY by Bank of America

Meanwhile, despite some near-term headwinds, the fundamentals for air travel are still intact. Analysts predict that, over the next 20 years, passenger and freight traffic will climb on average by 4.9% and 5.4% annually. What's more, with oil at $80 per barrel and environmental concerns growing, many carriers are being forced to replace their older planes with more efficient ones.

Indeed, the combined trends of greater mobility, better fuel consumption and lower pollution are forecast to boost the size of the world's fleet from 18,800 in 2008 to 35,600 by 2028. Factor in 12,200 aircraft due to be retired, and aggregate demand for new aircraft could reach 29,000, which is worth $3.2trn at 2008 prices.

Wall Street is forecasting 2010 sales and underlying earnings per share (EPS) of $65.8bn and $4.39. This puts the stock on an undemanding p/e ratio of 10.9. Boeing also pays a 3.4% dividend yield.

So what are the risks? The firm faces difficulties with the development of its new Dreamliner 787 (super-jumbo) and 747-8 freighter jets. The 787 (with a light carbon-fibre frame that will make it 20% more fuel-efficient than existing models) has orders for 840 planes, worth some $136bn. But it's been dogged by delays and cost over-runs.

Then there's customer default risk, safety/terrorist scares, currency fluctuations, possible strikes and defence cuts on big weapons systems. While net debt is a comfortable $4.4bn, pension and healthcare obligations of $15.8bn also need to be watched. All the same, with the aircraft financing market opening up again, Boeing is a buy,

Recommendation: BUY at $48.50

• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments

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