I have seen passing references to the problem Boeing (NYSE: BA) has had with the Dreamliner battery, but never really looked into it. The stock seems to be unaffected, but I think if it can announce a fix it will push the stock a bit further. Considering it is pushing its 52-week high in the last few weeks I think it is better to ignore the short-term, and focus on the potential for the company to generate nice returns in the long run.
Dreamliner problems deflected
Boeing would appear to be unaffected by the Dreamliner battery issue. The basic problem is that the battery and electrical systems develop fault unexpectedly, and a few cases of thermal runaway leading are confirmed. If you were on some of the flights affected it would be a fairly dramatic problem. For Boeing it presents a superficial problem, because its business is larger than Dreamliner. The company is testing a fix, and from what I have read the problem does not seem unduly complicated.
Completion of the battery testing and approval by the FAA to implement it will be a positive catalyst for Boeing. It is imminent, but might already be priced in. This is the reason that I want to focus on the bigger picture. The Dreamliner is Boeing’s future. There is no way that the plane is going to be abandoned. The design is brand new, and problems are common. Market participants seem to be aware of how minor the setback is.
Is Boeing’s momentum temporary?
Revenue has been growing, which is good if not surprising. The consistent news regarding orders turned me onto Boeing months ago. It is good that it has continued despite the recent troubles. The concern I have is that increasing revenues have not translated into increasing net income.
Boeing has a 2.3% dividend. This is lower than peers like Northrop Grumman (NYSE: NOC), while Boeing boasts a higher PE and more debt. Boeing boosted its dividend at the end of 2012, while announcing a stock buyback that could reach up to $2 billion. That is a large enough buyback, but I feel that it actually has more to do with analysts being positive on the company. I question the ability of analyst generated momentum to sustain a stock long-term. In the short-term, when the battery fix is announced as having been accepted by the FAA it should push Boeing past its 52-week high into the lands beyond.
The recent boost is due to the soon to be realized solution to the battery problem along with positive catalysts regarding the hiked dividend and share buyback. The news of more sales fuels the fire, but there is always news like that. Boeing is one of the major airplane makers on the planet.
A non-growing dividend stock?
Northrop Grumman has seen its revenues fall over the last few years, and seems to be at a bottom in that regard. Net income during the same period has stayed flat, which is a good result for a company having shrinking revenues. Last year the problem with revenue was issues regarding some military aircraft. Continued U.S. spending constraints are likely to place a pall over growth into the future.
The thing about Northrop Grumman is that if it really has reached a bottom in revenues, and has managed to maintain its net income. It actually had an earnings beat for 4Q2012. That is a sign of a well run company, and if you have your eye on the long-term picture it might work in the company’s favor when sales start increasing again. Northrop has a lower PE than Boeing, 9.1 vs. 16.5. Northrop has had a lower PE for a while, probably due the concern over the tough environment stemming from government belt-tightening.
Boeing is already leading the pack with its PE. Northrop is not bleeding money, but it is not growing quite like Boeing. Boeing’s bottom line growth has lagged the top line. Northrop also has a 3.2% dividend yield, which is higher than Boeing’s. For now Northrop is a dividend play without significant growth prospects, but once the macro-environment improves it could move up with a PE approach 12 with simultaneous increases in sales. I have not seen any catalysts or developments of note and 2013 is expected to be flat with 2012.
Try a dividend paying airplane bank
Instead of going with the companies that make airplanes you can go with leasing companies like Fly Leasing (NYSE: FLY). The stock is taking a breather from its recent run. Not much has changed since I wrote about it last. It still has nice net margins at 23%. The high debt is expected because buying planes costs money. The stock as a dividend yield above 5%, and is primarily a dividend investment. It should not be counted on for capital appreciation.
The company is planning an expansion of its fleet, but is also trimming the fat by getting rid of old planes that would not substantially add value to the company. The sales are above book, so that is good news. It is possible to read this as a negative event, but being a negative person is not healthy. In fact it makes sense for a leasing company to only keep planes that can bring it value. Old planes are less desired, and would probably command extremely low leasing fees anyway.
Conclusion
Boeing is already up a lot, but worse than that it has a lot of attention on it. Northrop has had a hard few years, and is priced at lower multiples. They have dealt with the difficult environment well, and that speaks volumes about the competence of management. In an improving environment it could bring a nice return, and has a higher yield than Boeing. The highest yield in the group belong to FLY leasing, but in exchange for this you give up the potential for real capital appreciation. The decision comes down to goal. I like Northrop’s balance.
Additional Riffing:
Stick to dividend plays with airplanes. Only Northrop Grumman should be played for capital appreciation. I might consider some far out calls, but I want to wait till I see upcoming catalysts. Until U.S. defense spending starts upticking again, which could be a while, Northrop is likely to continue having a tough time. I will monitor it for developments, but I cannot picture any catalysts for the company.
Commercial planes are sewn up between Boeing and Airbus. So do not hold me to my claim that I might get calls. I still do not see enough that would warrant the position. On the other hand if I can get them super cheap, I might just get them based on a generally improving economy.
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