Stocks marched higher in early trading as investors seem to be shake off a larger than expected increase in consumer prices. The Department of Labor reported that the CPI rose 5% in May, compared to one year ago, surpassing economist expectations of a 4.7% gain.
As pandemic trends continue to reverse, companies from cyclical sectors seem like a solid choice moving forward. Cyclical companies stand to benefit more from the pickup in economic activity because they are very sensitive to economic growth. With the U.S. projected to experience the fastest GDP growth this year since 1984, the case for some cyclicals, namely industrials, is strong.
Our trade alert for today focuses on a high quality investment from within the industrials sector and a top choice for hedge funds moving into the second half of the year.
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Founded in 1916, The Boeing Company (BA) has a well established reputation as a global leader. Most investors know Boeing as a maker of airplanes, rockets, satellites and missiles. But the company also offers supply chain and logistics management, maintenance and modifications, and spare parts for aircraft.
After the start of the pandemic, the stock went into freefall as people wondered if airlines would be able to survive border closures and lockdowns around the world. The stock plummeted from $338 on February 19th, losing more than 72% in less than 1 month, dipping below $100 before beginning its choppy recovery. BA share price has made up a significant portion of the loss, but at current levels, still sits 24% lower than it’s pre-pandemic 2020 high.
The company posted Q1 results on April 28th. While their EPS of -$1.53 missed market expectations by $0.46, their revenue over the period was more than $15 billion, beating market estimates by $140 million.
Asset management firm Miller Value Partners highlighted BA in its Q1 letter to investors. Here’s is what they had to say:
“We bought the stock after the new CEO Dave Calhoun said publicly that it would not take government capital if it required equity dilution because it had many other options. Our average price is just above $120 where it was trading for less than 7x what it earned in 2018. It will likely take a while to normalize to those earnings levels, but this business will survive and ultimately we will own a leader in a global duopoly. Even on depressed forecasts, the company currently has about a 10-15% free cash flow yield. If and when the economy normalizes, we think Boeing could be worth more than double its current price.”
BA stock seems to be back on track after recent weakness due to its highly publicized 737 Max issues. Reuters reported last month that Boeing had drawn up preliminary plans for a fresh sprint in 737 Max output to as many as 42 jets a month by the fall of 2022.
The plane maker recently reported that it has been offering some customers steep discounts, reduced upfront payments and other inducements that may not be available once global air traffic returns to more normal levels. Incentivizing purchases by long-time customers like Southwest Airlines (LUV), which just upped its 2022 firm orders by 34 Boeing 737 MAX 7, bringing its total firm orders for MAX 7 aircraft to 234. As leisure air-travel demand continues to improve, others may follow suit.
Boeing is a high quality company and as such, trades for a premium valuation. But an investment in BA is an investment in its position as a global industry leader. As leisure air-travel demand continues to improve, the case for BA at current levels is gaining appeal.
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