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Boeing Shares Up 43% as Demand Zeal Trumps 787 Trauma

CHICAGO ( TheStreet) -- Investors and analysts have decided that continued strong demand for Boeing (BA - Get Report) aircraft, not fears of the unknown, should define the share price.

Their confidence has made Boeing the second-best performing stock in the Dow Jones Industrial Average in 2013. Shares are up 43%, trailing only Hewlett-Packard (HPQ), which is up 90%.

In recent years, the shares have performed unpredictably, largely related to concerns over delays in delivery of the 787 and then to concerns over the Federal Aviation Administration's decision to ground the plane due to unexplained fires in its lithium battery.

The cause of the fires in two aircraft remains unclear, but containment issues apparently have been resolved.

Boeing shares opened the year at $76.55. On Jan. 16, the day the FAA grounded the 787, shares opened at $73.85, close to the year's low of $73, which they reached in late January. The price has climbed since then, even when the airplane was grounded with no clear view of when it might fly again. By April 19, when the FAA gave the go-ahead to return to the skies, shares closed at $87.96. The stock closed Monday at $107.50.

Now, the story is all about demand. The world is hungry for large aircraft, and for the moment Boeing and Airbus are the only two major manufacturers. "The commercial aerospace sector is poised for accelerated growth in revenue, cash flow and earnings over the next several years," wrote Moody's bond analyst Russell Solomon in a report issued July 31. "Still-expanding order books will continue to be accompanied by advance payment-related cash flows."

"Greater deliveries of large commercial aircraft will soon outrun working capital consumption related to ramping production rates, driving even stronger growth in cash flow by 2014-2015," Solomon wrote, adding that the manufacturers will benefit from low capital costs and from declining R&D costs. Moody's has A2 stable ratings on both Airbus and Boeing.

While rising production rates for narrowbody A320s made by Airbus and Boeing 737s will match deliveries, given the strong demand, "it is the widebodies (mainly the 787 and A350 XWB) that will grow at a much faster clip, albeit off of a much lower base, and contribute most significantly to our expectations of accelerated revenue and cash flow growth," Solomon said.
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