3 Ways To Buy The Boeing Boom, Without Buying Boeing (NDX)

Is it too late to buy Boeing? Right now? Yeah.

The soaring price of Boeing (BA) stock has been nothing short of breathtaking. The question that looms large in those like myself who on the last execution issue, sold the stock, is it too late? Perhaps. Or with some patience finding an optimal moment to rejoin the Boeing faithful will open up. I’ve made no secret of my belief that we should have a 10% correction mid-Q1 and have said so weeks ago. (read about it here). The irony of the cause of selling BA was the mismatch holes in the bulkhead of the 737, were due to poor execution at Spirit AeroSystems Holdings (SPR). This was the “gang that couldn’t shoot straight” all over again. Time and again it seemed that SPR was the bottleneck to getting 737s out the door. Well, somehow and in rapid succession. BA seated what seems to be a very able ex-Boeing executive in the C-Suite by the name of Patrick Shanahan, his other moniker at Boeing was “Mr. Fixit.” Also on his resume is that he served as Acting Secretary of Defense. Boeing invested some cash in SPR along with the appointment of the new CEO and seemingly it has been off to the races ever since. In horseraces as in capitalism, there is the horse and there is the jockey. Sometimes a horse needs the right jockey to win the race, and it is quite apparent that Mr. Shanahan is the right jockey for SPR. With his appointment on September 30th, BA took off like a rocket, well it took a few weeks. BA, starting from the first day of trading on October 2nd, took 23 days to reach the recent lows of 176.25 and the stock has been soaring ever since. Let me make my point clearer by asking you to look at the chart below:

If you have a better theory as to why things are looking up at BA I’d love to hear it, because nothing changed in the C-Suite at BA, and all of a sudden they are breaking to 52 Week Highs and taking names.

What about SPR? Don’t they deserve some credit here?

Certainly, they do, and that is where I am going with this analysis of the commercial aerospace sector. BA commands a lot of attention, it is our biggest export, and a fantastic investment as long as their planes continue to regain their reputation as the most air-worthy and dependable products. In reality, there is a whole ecosystem of suppliers and parts makers that are responsible for major parts of the plane, and that is what I want to share with you today. The first of which is SPR, SPR is a vital supplier to BA in that it builds the fuselage of the 737. It was spun out of BA and in the beginning, BA took advantage by squeezing every nickel out of the supplier that it could. I would say BA is now more enlightened. Also over the years, SPR added arch-rival Airbus (OTCPK:EADSF) as a customer along with some others. So perhaps SPR can resist being squeezed too far for efficiency, as I said, I think BA has learned a valuable lesson about not strangling an important supplier. So far, the recovery in SPR is nearly non-existent, and I think it is way underpriced. Back in February 2019 the stock was at 100, I would venture a guess that SPR is back on track and should at least have the same percentage rise as BA right now. Here is a 6-month chart with both SPR and BA…

BA is orange, and clearly, SPR has some catching up to do. I bought some SPR shares over the last 2 weeks and I intend to add more. The 52WH for SPR is 38.55, SPR closed up nicely this Friday at 29.57 so to get back to the 52WH we’d get 23.3%. The rise in BA from 178.25 to the 52WH close on Friday of 264.27 is up 32.65% If I added the additional 15% to that 23% rise to the 52WH we would see at about 51 per share. Ok, that is good enough for me. Right now, that 100 level of 2019 seems a long way off for SPR being that BA still has proverbial “miles to go” to attain its old highs.

I said there were 3 ways to buy the Boeing boom whose next? That’s easy GE

What’s that you say? GE’s price is already sky-high, how in the world can you justify it going even higher? I grant you that GE has made enormous strides in regaining the value it once had, and even with all the spinouts I am sure if you add up the market caps of all the companies they still probably don’t make up for the loss in value, when you figure in inflation and of course the gains of the S&P 500. We don’t cry over spilled almond milk, we look forward. Looking forward just mechanically, and by mechanically I mean how markets work, and GE still has one spinoff left before it can become the premier aerospace company on the planet. GE is going to spin off Veronas the power business, which is the air turbine and the old power systems business. The wind turbine was the last disastrous acquisition of Jeff Immelt and an interesting coda to the painful downfall of yesteryear’s “tech” titan. There was a time when GE was the best-run company in the world, and any S&P 500 board wanted a winning CEO for their company they’d poached someone from GE and then pat themselves on the back for a job well done.

Now we have the new Titans that can do no wrong, hubris comes from success that is too easy. Iron sharpens iron and competition is what keeps all companies healthy. Ok back to the job at hand, the spinoff will happen at the beginning of the second quarter. According to Barrons “the company will host an analyst event on March 6, 2024, in New York City to provide investors with an overview of its business.” I think this will be a catalyst for further gains once the power systems business is jettisoned then aerospace analysts can truly value the company for just that business. This is a high-growth business with recurring revenue, and given the difficulties that both Rolls-Royce (OTCPK:RYCEY) and RTX Corporation (RTX) are having with their engines, GE stands to gain new design wins. However, if RTX can fix their advanced GTF engines, I think they would be a buy too. I started nibbling on RTX a while ago with a tiny position hoping to hear something encouraging, though their defense business is very attractive as well. As far as RLLCF, there is room for everyone, and I hope they turn their business around. I refer to the brouhaha with the CEO of Emirates who ruled out purchasing the Airbus 350-1000 because it uses Rolls Engines. Anyway, GE Aerospace will be the official name with the symbol of GE, and I expect the March 6 investor meeting to wow the investment community. They will be gushing cash, and not just cash, but beautiful recurring revenue-type cash. GE Aero will go shopping, and we know that Larry Culp knows how to go shopping. He will build the aerospace version of his alma mater Danaher Corp (DHR) where he was CEO from 2000 to 2014, and during his tenure, the company increased both its revenues and its market capitalization five-fold (according to the GE corporate website).

So just to summarize here, GE is going to be GE Aerospace where it will be valued as the best jet engine maker on the planet. It will gush gobs of cash. Once the spinoff is complete Larry Culp will be able to bring his true genius to bear in aerospace and that is growing by tuck-n acquisitions, step-by-step. So with this great future ahead of it, it must be overpriced, after all, it has shot up so high recently, right? Well the PE is under 13, at 12.82, which is even lower than the equal-weight S&P 500, which I understand is 15. Just a point of comparison RTX is over 30, at 37 times to be exact, even RYCEY is higher at 14.56 PE. Ok, that is two, what is number 3?

Let’s go with Howmet (HWM)

Since many of you are unfamiliar with HWM it was spun out of the troubled (at the time) Alcoa (AA) starting with the moniker Arconic. They make highly engineered parts for a variety of industries. A lot of their parts end up in jet engines, which means that not only are they involved in brand-new airline manufacturing but also in replacement parts. According to HWM’s website: “Wingtip to wingtip, nose to tail, Howmet Aerospace’s materials and solutions are on board. We can produce more than 90 percent of all structural and rotating aero engine components, and we invented over 90 percent of all the aluminum alloys that have flown.” The financials are great, Howmet Aerospace’s third-quarter earnings grew 28% over last year’s period. Growth was in line with the 26%-35% range of the past five quarters. Its operating income rose 35% over last year’s period. Sales growth slid to 16% from 18% and 21% in the prior two quarters. As long as it grows free cash flow at 10%+ annually we should be satisfied holding this name as an investment. The largest supplier of titanium has always been Russia. When building the SR-71 Blackbird Lockheed Skunkworks had to lie about what the order was for titanium to get enough to make them. I think they said it was going to be used for pizza ovens. Anyway, anecdote aside it isn’t easy to get titanium right now, which means counterintuitively, they can charge more money for titanium parts.

All the above are about investing, I can’t say with certainty that these names will be unscathed if we do have a sell-off mid-Q1. HWM is pretty fully valued at 34 PE, still, their future is bright because flying is still growing. People still want to travel, and flying will get cheaper as the price of oil comes down. Yes, despite the spike in oil last week, I am more convinced than ever that oil is going lower, as I said in a recent article, Private Equity is selling out of the oil patch and so should you, If you haven’t read that here is the link.

What about trades?

I got long Adobe (ADBE) In Call options at the 600 strike because as I predicted Shantanu Narayan the CEO pulled back on guidance. I don’t blame him, there are some unknowns as far as short-term demand for AI in the enterprise. We saw that in the disappointing performance of Oracle (ORCL). Still, I believe that ADBE will rebound into the Santa Clause rally which hasn’t even started yet. I’m only looking for the low 600s before I take profits. The other is more of a long-term investment with a trade on top, and that is Moderna (MRNA). I believe we are witnessing an astonishing breakthrough in the fight against cancer. The CEO of MRNA appeared on CNBC and confirmed that they had a 49% survival rate for Melanoma. Not very long ago Melanoma was a death sentence, now with this vaccine in combination with Merck (MRK) Keytruda there is hope of a cure. Mr. Bonsal shared that he believed the survival rate would rise, but no one seemed to make note of that opinion. I did, and I bought shares around 86 and went long calls at 90 strikeout to March. Some in the Group Mind felt that MRNA could fall back to the 70s. That would only encourage me to buy more. Bear in mind that this vaccine technology is a platform and will be applied to other cancers. As far as the long call at 90, my thesis was that conventional media would want to carry some positive news for a change, and that could buoy the price further. I am willing to give it a week, and if it doesn’t catch on I will be just as happy building a position with a lower cost basis as the price consolidates in the 70s. That isn’t my base case, I think MRNA does deserve a much higher price on this news, somewhere above 100. That is just one man’s opinion, how about yours? Leave some comments, and please be respectful. I will reply.

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