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OPINION

Boeing boing

Boeing boing
September 21, 2016
Boeing boing

Meanwhile, Boeing's current success is grounded in the unequalled demand for its 737 medium-range aircraft, a humdrum work horse if ever there was one. True, when the 737 was launched in the late 1960s, it lagged so far behind its rivals that Boeing's bosses considered ditching it. Then came the democratisation of air travel, led by Southwest Airlines of Texas for whom the versatile 737 became the aircraft of choice. Other low-cost carriers followed suit to such an extent that deliveries for the so-called 737 'Classic' version rose from just seven in 1984 to 218 in 1992. Aggregate all the versions of the 737 and Boeing has delivered more than 9,000, making it by far the world's bestselling airliner. Or, as Boeing's publicity department says, somewhere in the world a 737 takes off or lands every five seconds.

More important, the 737 is Boeing's future, too - or, at least, what's foreseeable. The company's $480bn (£370bn) order book includes about 4,400 737s. By contrast, orders for all of Boeing's other models totalled just 1,400 at the start of the year. Sure, others in the range are more expensive. The 787 long-range Dreamliner, for which there are 780 orders, has a list price of $225m-$300m apiece, even if each plane actually sells for only half that amount. Yet, about three-quarters of Boeing's orders for the 737 are for the 737 MAX (first deliveries - to Southwest Airlines - scheduled for early next year). For these, the list price is over $100m each, about $30m more than an old-style 737. So, even when the standard industry discount is factored in (50ish per cent), Boeing should be picking up usefully more from those sales than it did with old-style 737s. Thus Boeing's future is bright. True, it has to joust with Airbus (Fr:AIR) in a duopoly that has an edge even if it isn't as competitive as each company's bosses like to make out. Meanwhile, other plane makers - especially Brazil's Embraer (EMBR3) and Canada's Bombardier (TSX:BRD) - build increasingly impressive machines.

The chief source of that brightness is the almost irrational desire of the world's population to fly more. Even while global economic activity and trade grew below their long-term average for the fourth year running in 2015, air passenger traffic grew by 6 per cent, the sixth year running that growth has topped 5 per cent. Extrapolating from past trends, Boeing's analysts guess that, over the coming 20 years, growth in air passenger traffic will average 4.9 per cent a year and cargo traffic will grow by 4.2 per cent. From that, they reckon there will be demand for 38,000 new planes, which may be worth $5,600bn. The number of plane deliveries looks feasible. After all, that works out at 1,900 planes a year - in 2015, Boeing and Airbus combined delivered almost 1,400.

That outlook implies that Boeing's medium-term financial future may be much like its recent past. That would be fine. In the past 10 years, average annual growth has been 5 per cent for revenues, 18 per cent for operating profits and 23 per cent for earnings per share, the last of those percentages being boosted by over $15bn spent to buy in Boeing's shares.

We can debate whether that's the best use of Boeing's money, but we can't really dispute that the group generates the cash flow to afford it. In the past five years, its capital spending has been consistently more than the depreciation it charges - to the tune of about $200m a year - yet, despite that, Boeing has generated $27bn of free cash in that period and paid out approaching $9bn-worth of dividends. That means there has even been cash enough to pay down some debt, as well as buy in that equity. Clearly, Boeing has no problem generating cash, an observation doubly underlined by the point that on average in the past five years 'cash conversion' - operating cash flow as a percentage of operating profits - has been 116 per cent and its cash flow return on equity has averaged 17.5 per cent on a rising trend.

Better still, it's not obvious that these merits are reflected in its shares with the price at $127.50. At least, applying data for the past five years to the simple valuation spreadsheet to which I introduced readers earlier this year (see Bearbull, 18 March 2016), we get a per share value for Boeing of $146 (

). True, it's a rough-and-ready exercise that's indicative, not definitive. But arguably what I like best about the shares is the very loose correlation of their returns to those of the Bearbull income portfolio (half the correlation of the All-Share index's returns to the income fund). That implies that adding a holding in Boeing can reduce the portfolio's volatility, while enhancing its returns. So the income portfolio may be about to get its first overseas holding, especially as Boeing's London listing makes dealing easy.