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Practical Investing

I'm Taking a Flier on Boeing Shares

Even if trade talks with China head south, I think Boeing can prevail.

Courtesy Boeing

At times like these, I am grateful to be investing my own money. That's because I decided to go all in on Boeing (symbol BA, $339), and recent events make that look risky. I'm willing to accept the risk, but I'm not sure what I'd recommend to anyone else.

See Also: Trade War? These Stocks Will Do Best

Boeing has been firing on all cylinders. In addition to announcing major new orders for aircraft on a nearly weekly basis, the company already has a $488 billion backlog–roughly five times this year's expected revenue. Moreover, a "refresh" cycle for the wide-body jets that Boeing makes is expected to begin in 2020, which should keep the company's manufacturing facilities humming for years.

Earnings per share were up a whopping 77% in 2017 and are expected to jump another 15% or 16% in 2018, and the company hiked its annual dividend by 20% in December.

I bought 35 shares at $334.44 each when the market dropped on February 6, bringing Boeing down to what I thought was a reasonable price. I bought another 10 shares at $323.16 per share three days later, when the market dropped a little more.

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More bargain than I bargained for. Then came talk of a trade war between the U.S. and China. At the first hint of it, the price of Boeing's recovering shares plunged again. I wanted to buy more. But I was out of cash. After another trade-related downswing, I cashed out my shares in media firm Tegna, netting $11,456, and I reinvested the money in Boeing stock. I now own 81 shares of Boeing at a net cost of $26,683, an average of $329 per share.

Tegna was a recent purchase, sitting in the portfolio at a loss. Although I am undisturbed by short-term losses, Tegna's 2019 earnings prospects look weak. And my accountant loves it when I trigger a capital loss. It helps offset some of the gains I'm required to pay tax on, now that I'm partly living off the fruit of my portfolio.

I bought Boeing, even with the specter of a trade war, because I'm hoping cooler heads will prevail. And I'm not convinced that Boeing will be devastated if trade talks head south.

There are two ways Boeing could be hurt by tariffs imposed here or in China. They could increase the company's cost of producing aircraft, and they could make the company's products less competitive overseas.

Chris Higgins, an aerospace analyst at Morningstar, dismisses the concern about rising costs. Aluminum and steel, on which President Trump has imposed tariffs of 10% and 25%, respectively, account for a small fraction of the cost of producing an aircraft. Higgins estimates that Boeing's production cost would rise by less than 2.5%, and some of Boeing's contracts allow the company to pass that modest cost hike along to buyers. The greater risk is to Boeing's competitive position around the world. Boeing sells about 70% of its jets and commercial aircraft to buyers overseas. About 20% of its backlog consists of orders from China, Higgins says. If those orders were canceled, Boeing's backlog would look far less impressive.

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Notably, most of Boeing's commercial aircraft appear to be excluded from China's proposed tariffs. And China desperately needs new planes to keep up with demand for commercial flights. But if the country's airlines shift future orders to Boeing's competitor, Airbus, it could have a chilling effect on Boeing's revenue and profits.

I'm betting that won't happen or, if it does, that Boeing will prove doubly competitive in the rest of the world to make up for the losses in China. That's a bet I can make with my own money. But I'd hate to gamble with yours.

See Also: What's a Trade War? The Arguments For and Against Protectionism