Contrarian Call: 40% Drop in Boeing Shares Looks Overdone

The decline in shares of Boeing (BA) has been significant over the last year. The stock has fallen 40% from $107 to $64 as high oil prices force most domestic airlines into heavy losses. The market appears to be acting as though Boeing’s only customers are domestic airlines. If that were the case, one could certainly argue near-term earnings growth would be non-existent and the stock deserves the severe haircut it has seen (BA trades at 12 times trailing earnings, 11 times 2008 estimates, and 9 times 2009 estimates).

Boeing – One Year Chart:

Investors need to keep in mind that Boeing will get 50% of its revenue from its Integrated Defense Systems (IDS) division this year, with the rest coming from commercial aircraft. The growth in the aircraft segment is coming from overseas, not the United States. With global economies growing faster than ours, much of the 95% of the world population not living in the U.S. are beginning to either fly more or fly for the first time. Countries like China, India, and the UAE are ordering more and more places from Boeing to boost their fleets. Boeing is not a one trick pony by any means.

The company has also been hit due to delays in its new 787 Dreamliner, its next generation plane. Wall Street obsesses over short term events, so a delay of a few months will hit the stock, but in reality, long term investors should feel confident that Boeing has a new product cycle coming. New planes cost more than the old ones and the 787 improves fuel efficiency dramatically, which is a great feature with high oil prices. Even with some delays with a project this big, Boeing’s earnings should still accelerate after the 787 starts being delivered.

Boeing appears to be an excellent contrarian investment option after a 40% drop in stock price. There are clearly issues facing the company, but the current valuation, I believe, has factored in most of the negativity. Even if 2009 profit projections turn out to be too optimistic (current consensus is $6.93 per share), the stock looks very cheap. Even if earnings only reach $6, Boeing at $63 trades at only 10.5 times forward earnings and yields 2.5%. That is a pretty meager valuation for a company that, combined with Airbus, dominates the aircraft market and has a strong defense business in a volatile geopolitical climate.

As a result, Boeing will be added to the Blog Model Portfolio after the market close today.

Full Disclosure: Long shares of Boeing at the time of writing