Dueling Fools
Boeing Going or Gone
June 2, 1999

Boeing Bull Argument
by Paul Larson ([email protected])

It's been a turbulent two years for the aerospace giant from Seattle. Production gaffes, the Asian economic situation, and the acquisition of former competitor McDonnell Douglas have essentially sucked all the profits away from the largest plane builder in the world. There is no doubt that the company's recent financial performance is nothing short of gloomy. However, Boeing is taking drastic measures to cut costs and improve profits that should have a positive effect on the stock, if they're successful.

Let's first talk about exactly what Boeing is:
- The ninth largest public company in the nation on a sales basis.
- The largest commercial airplane builder in the world with a marketshare near 60%.
- The premier player in the space industry with contracts for large chunks of the Space Shuttle program as well as the International Space Station.
- The third largest defense company in the nation, behind only Lockheed Martin <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LMT)") else Response.Write("(NYSE: LMT)") end if %> and Raytheon <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RTN.B)") else Response.Write("(NYSE: RTN.B)") end if %>.

The recent consolidation of the aerospace industry has left only a handful of major players in each niche, and Boeing is the 500-pound gorilla in many of the businesses it is in. From jumbo jets to space launch vehicles to cruise missiles, Boeing is a dominant force. The company's size and positioning make it nearly impossible for new competitors to inch their way onto Boeing's turf.

One of the interesting characteristic's about Boeing's business is that demand remains quite healthy across its product lines. As of March 31, the company had an order backlog of a whopping $113.8 billion. That means Boeing has roughly two years worth of orders yet to fill, and new orders are coming in all the time. If Asia can rebound further than it already has, look for even more orders for planes to come flooding in.

The company's defense segment is also looking up. Between Iraq, the revelations about Chinese espionage and, of course, the conflict over Kosovo, the sentiment in Washington is that perhaps defense spending has been cut a bit too deeply. Every bomb that is dropped on Kosovo has to be replaced in the arsenal, and Boeing is a major supplier of missiles and bombs to the government. Plus, should defense spending see an uptick in the future, few are positioned better to benefit than Boeing.

This isn't to say that all is rosy in the company's defense sector. Boeing recently decided to significantly curtail production of its F-15 fighter after not winning some major contracts overseas. However, I think the decision to essentially halt production of the fighter jet shows that the company is being true to its word and showing some financial restraint.

The F-15 situation is as good proof as any that Boeing is indeed focusing on cutting costs, improving efficiency, and jettisoning lines of business that do not meet the company's return on investment criteria. Instead of maintaining the F-15 production line, a business that at current demand has a sub-par return on investment, the company decided that its assets were better deployed elsewhere. Increasing efficiency and better utilizing the company's investments are a priority of Boeing's new CFO, and such programs are exactly what the doctor ordered to improve the health of the company's bottom line.

Some of the improvement already has made itself evident in the company's latest quarterly report:

(millions)      Q1  1999     Q1 1998      Change
Sales           $14,392      $12,945       +11.2%
Operating Income   $739         $119       +521.0%
Net Income         $469          $50       +838.0%
Diluted EPS        $0.50       $0.05       +900.0%

Next: The Bear Argument