Hedge Funds Are Positive on Boeing Co Stock. Should You Be?

By Markets Fool.com

Boeing started 2015 with solid fourth-quarter results, and the stock has hit new 52-week highs three times in February. There's yet another development: Holdings Channel, which analyses 13F filings of hedge funds, has found that hedge funds are buying Boeing stock. It studied 1,221 funds and found Boeing shareholding among them has increased by more than 9% in the September-December quarter of 2014 compared with the July September period.

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Hedge fund managers' confidence could be a result of Boeing's better cash generation, huge commercial backlog, the 787 Dreamliner program nearing breakeven, and the boom in the commercial aviation market. Each of these developments provides reasons to be bullish on the company -- here's thelowdown.


Boeing787-9 Dreamliner. Source: Boeing.

Boeing's strengths
Better cash generation: Boeing's cash generation has returned to a good level mostly because of higher jet deliveries. In the final quarter of 2014, the company's operating cash jumped 262%, helping it reverse the declining trend of the previous three quarters. As a result, full-year operating cash increased 8% to $8.9 billion compared with the year-ago period. The healthy improvement came as a relief for Boeing investors worried about volatile cash generation..

In 2014, the aero major delivered 723 jets well within its expected range of 715 and 725 units, against 648 in 2013. Over the fiscal year 2015, the cash flow trend could remain strong as Boeing expects to deliver between 750 and 755 planes based on the production rate hikes of the 737 and 787. The company is already producing 42 737s per month, up from 38, and 10 787s a month, up from seven previously. Management aims to produce 12 787s a month by 2016.

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Higher deliveries could usher a faster cash conversion cycle. For 2015, the company is expecting to record more than $9 billion in operating cash. Based on this expectation, the company has increasedits share buyback authorization by $2 billion and dividend payout by 25%.

Huge backlog: Backlog symbolizes an aerospace company's fundamental strength and sustainability. Despite higher deliveries, huge order growth on the back of strong demand has pushed Boeing's backlog higher.The company ended 2014 with 5,800 pending orders at the end of 2014. At current production rates this could keep Boeing busy for the next eight years to come.

In 2014, Boeing gathered total net orders for 1,432 planes, the highest in 12 years. It witnessed higher demand for its best-selling 737 planes and the popular 777 widebodies. Demand for the company's fuel-efficient planes remained healthy even when the price of crude oil more than halved in the second half of the year.

787 nearing breakeven:Despite delivering a good number of 787 Dreamliners in 2014, Boeing felt the pinch of increasing development costs. Costs went up as the company prepared to hasten production to 12 per month. Boeing still sells 787s at a loss, but it expects to break even in the second half of 2015, as costs per unit have dropped.

Market's strengths
Global: Passenger traffic has grown around 6% between 2010 and 2014, triggering demand for more planes, according to International Air Transport Association (IATA). IATA predicts passenger numbers to more than double to 7.3 billion in 2034 with an average 4.1% annual growth.

Boeing predicts 36,700 new airplanes will be required over the next two decades to meet global demand, which means the global fleet size will grow at a compounded annual rate of 3.6% in the period.

Emerging market (Asia): Boeing ascertains 58% of the global fleet size will come from the airline companies intending to grow their businesses. And most of that will happen in emerging markets, especially Asia. According to its findings, Asia would account for 37% of total deliveries over the next 20 years. Boeing could be a key beneficiary of Asian demand -- the region gave Boeing itshighest orders in value terms in 2014. The three biggest orders for Boeing in the year were from Asia.

Matured markets (North America and Europe): The remaining 42% of the global fleet will be replacements. The matured markets of North America and Europe have limited growth opportunities, but due to the aging fleet, huge demand for fleet replacement is expected.

Foolish takeaway
Hedge fund managers consider cash flow to be one of the most important indicators of a company's health. Boeing has shown a marked improvement in cash generation in the last quarter of 2014, and the outlook remains bright for the current year. This could be giving confidence to hedge fund managers. The commercial aviation boom is lifting demand and increasing the company's earning prospects.

The article Hedge Funds Are Positive on Boeing Co Stock. Should You Be? originally appeared on Fool.com.

ICRA Onlineand Eshna Basuhave no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.