Investors are turning to the skies to make money, betting on aerospace giant Boeing Co. to keep racking up airplane orders and profits.
Boeing shares soared to a record high on Monday after the Chicago-based company said it signed more than $100-billion (U.S.) in orders at the Dubai Airshow, which include its new 777X passenger jet.
The stock has nearly doubled over the past year, driven by strong growth in the commercial aircraft sector as more airlines buy new planes and replace old ones with more fuel-efficient models.
The shares are outperforming other aircraft-maker names such as Canada’s Bombardier Inc. and Brazil’s Embraer SA, and are in line with rival Airbus parent, EADS NV.
While there is some concern that Boeing shares are flying too high, alongside a lift in other airline and aerospace industry stocks, analysts are bullish on Boeing and its huge order backlog.
“I like it,” said Cowen and Co. analyst Cai von Rumohr. “Right now they seem to be in a pretty good place.”
Boeing has increased production of its popular 737, 777 and 787 airplanes, citing strong demand for new planes.
The company has a huge $415-billion backlog, which is more than 4.5 times estimated 2013 sales, according to Morningstar Inc. analyst Neal Dihora.
Mr. Dihora now predicts sales to grow by 6 per cent annually, up from previous forecasts of 4 per cent, “driven by achieving higher production rates sooner.”
Boeing’s strength comes despite highly publicized battery-related problems on its 787 Dreamliner earlier this year and concerns its defence division would be a drag on profits, due to growing government cutbacks.
D. A. Davidson & Co. analyst J.B. Groh increased his price target on Boeing after the company raised its full-year earnings guidance last month, but said its defence division – which represents about 40 per cent of revenues – is a concern.
“While Boeing is executing well and the strength of the commercial backlog is undeniable, we prefer names with lower defence-related exposure,” Mr. Groh said in a note, after moving his target to $140 from $115. He has a “hold” rating on the stock.
The consensus among analysts is that Boeing shares will hit $145 over the next 12 months, with price targets ranging between $124 and $175.
Boeing stock hit $142 on Monday, before closing at $138.36, up $2.28, on the New York Stock Exchange. Boeing shares are up about 95 per cent over the past year, while the Dow has climbed by about 25 per cent.
Analysts expect Boeing’s momentum to continue. Among the 27 analysts that cover the stock, 11 have a “strong buy,” 12 recommend it as a “buy” and four say “hold,” according to Thomson Reuters I/B/E/S.
The stock isn’t cheap, trading at about 18 times next year’s earnings estimates, compared with 13 times for Embraer and nine times for Bombardier, according to data compiled by S&P Capital IQ. Defence companies Northrop Grumman Corp. and Lockheed Martin Corp. are also cheaper at 13 times earnings.
Still, many analysts continue to see Boeing as a good investment.
“We believe multiples at the upper end of the historical range are appropriate considering the strength of the commercial aerospace cycle,” according to a recent note from Canaccord Genuity analyst Ken Herbert, who has a $150 price target on Boeing and a “buy” rating.
Compared with Bombardier and its CSeries jets, analysts believe Boeing and Airbus are still more competitive.
“[Boeing] is in the good part of the cycle, where Bombardier is still in the risk part of the cycle. They’ve been late on the CSeries. Will they be late again?” said Cowen and Co.’s Mr. von Rumohr, who has a “buy” on Boeing and $175 price target.
Gordon Reid, chief executive of Toronto-based Goodreid Investment Counsel Corp., said his firm chose Boeing as an investment because of its industry dominance.
“Boeing is the kingpin of the aerospace industry,” said Mr. Reid, whose firm has been buying the stock since 2008. “We continue to be a buyer of the stock, but if it continues to run at the same pace it has in the last few months … we’ll have some decisions to make.”