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Boeing Cleared for Takeoff

Chris Higgins

Christopher Higgins: We recently reinitiated coverage on Boeing (BA) and upgraded its economic moat to wide from narrow. Boeing's wide economic moat gives it considerable long-term earnings potential, and we expect the company's returns to remain safely above its cost of capital for the foreseeable future.

Boeing benefits from significant barriers to entry, which are imposed by the high degree of technical knowledge required to design, assemble, and certify aircraft.

We think Boeing also benefits from switching costs in both commercial aerospace and the defense market. Airlines are reluctant to choose an unproven manufacturer given the high costs associated with an aircraft failure, coupled with the need for service and support an aircraft. Thanks to these factors, Boeing's success in defending its market position from the threat of new entrants is likely to continue.

Boeing's shares recently took a hit on a worse-than-expected 2016 outlook. However, we still see value due to the company's massive commercial aircraft backlog, its profitable defense business, and management's focus on returning capital to shareholders.

We are also encouraged that the company is finally turning the corner on the 787 program, which removes a headwind to cash flow generation.

The recent sell-off has sent the stock down more than 16% year to date, and Boeing shares are now trading below historical valuation multiples. In our view, this creates an attractive entry point for long-term investors. Despite recently cutting our fair value estimate, we still see 25% upside from current prices, and we assign a 4-star rating to Boeing shares.