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Move over, FANG stocks. Here’s a one-word explanation for why the Dow Jones industrial average and Standard & Poor’s 500-stock index hit a new high on Monday despite geopolitical tensions, turmoil in the White House, and the threat of higher interest rates:
While investors have been piling into high-tech growth stocks, the giant commercial aircraft manufacturer and defense contractor has quietly emerged as the best-performing stock in the Dow. This week its shares rose above $240, and they’ve gained 50 percent this year.
That’s way ahead of second-place Apple, which is up about 36 percent.
And it’s better than Netflix, which is up 37 percent.
When it comes to valuation, there’s only one thing stock investors really care about, which is earnings. And the broad economic forces driving Boeing’s gains are lifting the earnings at many large multinational companies, which is in turn driving the major stock indexes to new heights.
Boeing had Wall Street analysts scrambling to upgrade their recommendations late last month after it reported $2.5 billion in earnings for the second quarter and raised estimates for future earnings and cash flow. The company reported an order backlog that totaled 5,700 aircraft, or about seven full years of deliveries. That will lock in profits and cash flow for years to come.
Seth Seifman, a J.P. Morgan analyst, called the quarter a “watershed.”
Dennis Muilenburg, a longtime Boeing veteran who took over as chief executive in 2015, is reaping praise for increasing profit margins and improving tense labor relations. But in many ways, the company is simply cashing in on the same dynamics that are driving earnings — and stock prices — of many of the biggest components of the market indexes.
Here are the key elements.
“Boeing definitely represents one of the big multinational companies that is benefiting from global economic growth,” said Michael Arone, a managing director and investment strategist at State Street Global Advisors. “We’re having a more global, synchronized recovery.”
He noted that Europe had outpaced the United States in economic growth this year, and that earnings at S.&P. 500 companies have shown double-digit growth for the first time in six years. In emerging markets like India and China, rising incomes are driving demand for leisure travel. “Global travel demand is rising much faster than its historical norm,” said Richard L. Aboulafia, a veteran aviation and aerospace analyst at the Teal Group.
In Boeing’s earnings conference call last month, Mr. Muilenberg noted that air passenger traffic had outpaced global economic growth this year, and that air cargo traffic was up a solid 10 percent for the first five months of the year. Demand for Boeing products “is more geographically diverse and balanced across the globe,” he said.
Few companies have proven more adept than Boeing at managing costs, something it had done in part though expanding operations in nonunion South Carolina and establishing what it calls “partnerships” with suppliers. (Boeing workers in South Carolina rejected a union organizing effort in February.) “They’ve done a great job on costs, crunching suppliers and labor while simultaneously increasing revenue,” Mr. Aboulafia said. “That’s impressive.”
This is especially true of the once-troubled 787 Dreamliner, whose delays, cost overruns and other problems now seem behind it. Mr. Seifman’s report said the 787’s performance had exceeded “even the more bullish estimates.”
But Boeing isn’t alone. “At a time of sluggish growth in the economy and top line revenue growth, companies have been very adept at managing costs and maintaining margins,” Mr. Arone said.
That, of course, is one reason that higher corporate profits have been so slow to trickle down to the rank and file and that wage growth has been so stubbornly low. The biggest beneficiaries have been shareholders. Boeing increased its share buyback program to $10 billion this year and raised its dividend by 30 percent.
Low Interest Rates
“Boeing is a huge beneficiary of low interest rates,” said Mr. Aboulafia, especially when fuel prices are high. Customers “have every incentive to replace aging planes with more fuel-efficient versions.”
And the purchase of an aircraft is a large capital investment typically financed by borrowing. “That’s true of many large manufacturers,” Mr. Arone said, which is why large-capitalization stocks have done better this year than their small-cap counterparts, which typically don’t make products that require large capital expenditures.
Low interest rates also mean that investors seeking income have few alternatives to stocks. That’s driven all the indexes higher.
The White House
As with many companies with global markets, Boeing’s future was clouded by President Trump’s vow to renegotiate trade deals and risk a trade war. He threatened to kill the Export-Import Bank, such a major lender to Boeing customers that it’s sometimes called “Boeing’s Bank.” After he took aim at Boeing in a series of tweets last December, threatening to cancel a contract to replace the aging Air Force One, it was a “heart attack moment” for Boeing shareholders, Mr. Aboulafia said.
Six months and one charm offensive later, Mr. Trump is singing Boeing’s praises. In February he posed in front of a newly minted 787 Dreamliner at Boeing’s sprawling manufacturing plant in North Charleston, S.C., saying he was there “to celebrate jobs.” He added, “God bless Boeing.”
“You should have seen the Boeing executives fawning over Trump in South Carolina,” Mr. Aboulafia said. “They basically pursued a campaign of radical sycophancy, and it’s paid off handsomely.”
While in South Carolina, the president promised a big order of Boeing’s Super Hornet fighter jets, and in May, the federal government followed through with $1.1 billion in this year’s budget for 14 of the planes.
In April he pledged not only to maintain the Export-Import Bank, but also to revive it.
Even the president’s threat to renew sanctions on Iran has had minimal, if any, effect on Boeing. Iran has placed two big orders for more than $20 billion in new commercial aircraft.
The Road Ahead
To what degree the president deserves credit for the rise in stock prices remains a subject of debate, but so far, he has been far more market-friendly than his campaign pronouncements suggested. “There’s been a lot of tough talk, but not much follow-through on the issues investors care about most,” like immigration and trade, Mr. Arone said.
And investors are still hoping for tax reform and a cut in the corporate tax rate. Last year Boeing paid $1.2 billion in federal tax, an effective rate of 23 percent.
Can all of this continue, given increasingly high valuations and an aging bull market? “That’s the dilemma,” Mr. Arone said. Boeing, for example, isn’t exactly cheap at nearly $240 a share, and its price-to-earnings ratio for the trailing 12 months is pushing 30, far above the market average. Cost cutting can only go so far. That hasn’t stopped the analysts from raising their target prices on Boeing: to $300 (Cowen & Company), $280 (J.P. Morgan) and $275 (Bank of America Merrill Lynch).
As for other large multinationals and the broader market indexes, Mr. Arone sees no immediate threat to further gains. None of the warning signs he looks for — more frequent market corrections, higher interest rates, and widening credit spreads — have yet materialized. “None is flashing red,” he said. “Not even yellow.” While conceding the bull market “is getting long in the tooth,” he said, “Bull markets don’t die of old age.”