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Philip van Doorn

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May 3, 2019, 3:21 p.m. EDT

Aerospace and defense stocks, even Boeing, are easily outpacing the broader market this year

Industry sales are strong, reflecting positive trends for air travel and U.S. defense spending

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By Philip van Doorn, MarketWatch


Lockheed Martin
Lockheed Martin F-35s arrive at Royal Air Force Marham in the U.K.

You might expect shareholders of Boeing to be suffering this year, in light of the tragedies and systems problems with the 737 MAX and investigations of the company and its product-approval process.

But the stock and the aerospace and defense subsector of the S&P 500 have both performed well, extending a winning streak.

In September, we showed how the S&P 500 aerospace and defense (A&D) subsector had outperformed the entire S&P 500 Index /zigman2/quotes/210599714/realtime SPX +0.0020%  over various periods. So far in 2019, the A&D subsector has returned 22% with dividends reinvested, while the index itself has returned 16%.

There are only 10 A&D stocks in the S&P 500, so what follows is a set of data for the 22 stocks in the S&P 1500 Aerospace and Defense subsector. The S&P 1500 includes the S&P 500, the S&P 400 Mid-Cap Index /zigman2/quotes/210599897/delayed MID -0.19%  and the S&P Small-Cap 600 Index /zigman2/quotes/210599868/delayed SML -0.52% . The expanded subsector has performed very well over long periods, as you can see in the tables and ETF performance lower down in this story.

Boeing — the elephant in the room

And what about Boeing /zigman2/quotes/208579720/composite BA -0.51% ? Let a chart tell the tale:


FactSet

Boeing’s shares have returned 17% so far in 2019. The stock was riding high — up as much as 37% — before it became clear how big a problem the company had with the 737 MAX. Still, it’s obvious there is tremendous support for the company. During the weeks before Ethiopia Air crash in March, there was a steady stream of large, new airplane orders being announced by the company.

So unless you purchased the shares in February, chances are that if you are a Boeing shareholder, you are at least satisfied with the stock’s performance. Looking ahead, it is obvious the company is bent on fixing the problems with the 737 MAX so it is no longer grounded. The company has had difficulty with new products before, although without the terrible tragedies of the two recent 737 MAX crashes. Remember all the headlines about battery fires and other problems with Boeing’s 787 Dreamliner? Those led to a grounding of that fleet by the Federal Aviation Administration in January 2013, with the airplanes returning to service in April.

Ultimately, the Dreamliner turned out to be game-changer for the industry, and for Boeing.

Looking ahead, support for Boeing on Wall Street is tremendous, with 18 of 25 sell-side analysts polled by FactSet rating the stock a “buy,” or the equivalent. All the other analysts have neutral ratings.

It wasn’t much of a surprise to see Boeing miss analysts’ first-quarter estimates for sales and earnings, and it did nothing to hurt the stock. In fact, investors were probably relieved when the company said it expected $1 billion in expenses tied to the investigation and correction of 737 MAX system problems that led to the plane crashes. One analyst even said he expected long-term upside of 50% for Boeing’s shares.

Boeing’s shares closed at $379.05 Monday. The shares were trading for 21.8 times the consensus earnings estimate for the next 12 reported months, according to FactSet. That is not cheap, when compared with 17.4 for the S&P 500 A&D subsector and 17 for the S&P 500. But in a world with limited competition in Boeing’s space and all the momentum from the continual increase in air travel, not to mention the decades of service contracts for the company’s products, the long-term thesis for the stock is intact.

For those with shorter horizons, the consensus price target for the stock is $442.82, implying 18% upside over the next 12 months.

/zigman2/quotes/210599714/realtime
US : S&P US
3,006.79
+0.06 +0.0020%
Volume: 1.55B
Sept. 19, 2019 5:17p
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/zigman2/quotes/210599897/delayed
US : S&P US
1,949.66
-3.77 -0.19%
Volume: 654.58M
Sept. 19, 2019 5:17p
loading...
/zigman2/quotes/210599868/delayed
US : S&P US
965.34
-5.00 -0.52%
Volume: 424.45M
Sept. 19, 2019 5:17p
loading...
/zigman2/quotes/208579720/composite
US : U.S.: NYSE
$ 384.44
-1.97 -0.51%
Volume: 3.03M
Sept. 19, 2019 6:30p
P/E Ratio
45.02
Dividend Yield
2.14%
Market Cap
$216.33 billion
Rev. per Employee
$660,961
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