Street Patrol
Recent articles:
• Buy this star of the big screen, 4/26/2006
• Apple just delaying the inevitable?, 4/20/2006
• Bet on Motorola's brand, 4/19/2006
More...
| | Street Patrol
Boeing's stalled shares will climb again
The company's earnings outdid Wall Street's expectations, but its stock fell flat. Here's why the stock should head to $100.
By Robert Walberg
If you're wondering why Boeing's shares fell Wednesday despite the company's better-than-expected earnings report, the answer is simple -- its another case of investors buying the rumor and selling the fact.
In anticipation of today's strong report, Boeings (BA, news, msgs) stock had gone vertical since late January, soaring some 29%. Unless the company had blown away expectations, there was virtually no chance that the stock was going to soar on the report. It was set up for profit-taking, and thats exactly what is playing out, with the stock down slightly on a day when the Dow jumped 71 points.
Though it might be difficult to comprehend a stock losing momentum on news of a 29% surge in net income on the back of a 12% jump in revenues, its actually a good thing. Boeings stock was overheated and needed a rest. As long as the stall remains contained -- and there was nothing in Boeing's earnings to suggest that it wont -- the stock remains well positioned to make a run at new highs.
Not quite perfect
Boeings impressive results were driven by a big jump in commercial airplane deliveries. Bolstered by strong demand for its new designs, first-quarter revenues in the Commercial Airplanes unit surged 48% to $7.1 billion. Almost more impressive was the 10% jump in operating margins -- an indication that the companys productivity enhancements and changes to product mix are having the desired affect.
And the good news shouldnt come to a screeching halt anytime soon. Not when you consider that the company ended the quarter with a record backlog of $213 billion, a gain of 4% from the prior quarter and a whopping 42% from the year-ago period. Management noted that the Dreamliner 787 program continues to gain traction, as 54 new aircraft were ordered in the first quarter alone. Since its launch a couple years ago, the program has generated nearly 350 orders.
More from MSN Money
Based on the companys impressive sales momentum and its record backlog, it was no surprise to learn that Boeing affirmed its earnings outlook for fiscal year 2006 of $3.25 to $3.45. The company also put sales at $60 billion, a smidge below market expectations of $60.66 billion. Boeing also sees revenues of $63.5 to $64.5 billion and profits of $4.10 to $4.30 in fiscal year 2007. The Street was expecting something closer to $4.35 on $64.6.
Obviously, the guarded guidance contributed to Wednesdays mixed reaction on Wall Street, though I suspect that the minor differences have less to do with slowing demand than with cautious management in the face of rising interest rates and higher energy costs.
There are a couple of other concerns. First, Boeing expects to see the number of commercial aircraft delivered over the next couple of years to slow from the unusually high pace set in 2005. Thats not a big concern, given that demand remains high and that there was no way the company would sustain last year's torrid pace. However, investors will want to keep a close eye on order growth to make sure that the slowdown merely reverts to the historical norms and nothing worse.
Second, Boeings defense business may struggle going forward if the growing federal budget deficit will eventually translates into lower defense spending. The unit posted a 6% year-over-year decline in revenues last quarter.
Headed to $100
Individually, none of these concerns is overwhelming. But taken together they create just enough doubt to justify the stock's decline. It should also be noted that going into todays session, Boeing was trading at a 25 times current-year estimated earnings and 19 times next years projections. Those were some pretty lofty premiums for a cyclical company like Boeing.
Bottom line: Theres no reason to think that the stocks long-term advance is over. Barring any negative shocks, look for solid growth projections, a favorable product mix, improving margins, rock-solid financials and a strong management team to translate into renewed gains once the froth has been removed. I see upside over the next 12-months to the $100 area.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
| |
|
|
|
|
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
|
