The Boeing Company or Boeing has been one of the economic engines of the United States. It has created employment and has remained one of the main American exporters in terms of dollar value. This multinational American corporation is also one of the largest aerospace manufacturers and defense contractors in the world. Boeing is also popular among stock investors because of its leadership, competitive advantage, and potential for further growth. However, in consideration of its recent mishaps, some investors have become skeptical about its capabilities to push forward.
Soaring High or Crash Landing: The Pros and Cons of Investing in Boeing Stock
Pros: Boeing Stock Advantages
Boeing had a good start. It built a strong base by excelling in seaplanes and earlier passenger aircraft. This positioned it as an emerging player in the emerging aviation industry. The company has also produced iconic commercial aircraft including the Boeing 707. This has cemented its international presence and place among airliners around the world. Boeing has also focused on both commercial and defense markets. Remember that it is one of the largest defense contractors in the world. Investing in the company means baking on its established global leadership. The following are the advantages of Boeing stock:
• Duopoly in the Commercial Market: Airbus is the only main competitor of Boeing in the commercial aircraft market. The high entry barrier in the market makes it expensive and generally difficult for startups to challenge the dominance of these industry incumbents. This gives Boeing a duopoly advantage and has allowed it to receive substantial earnings from the sales of its aircraft products and related services.
• Established Economies of Scale: Part of the competitive advantage of Boeing that also complements its duopoly advantage is its established economies of scale. It has a high fixed cost but a low variable cost that makes it more cost-efficient at research and producing products. The large production volume of the company has afforded it with bulk purchasing and bargaining power against its suppliers and customers.
• Commercial and Defensive Markets: Another advantage of Boeing stock is that its business focuses on both commercial and defensive aircraft and equipment markets. This translates to dual revenue streams. Both markets also have high growth potential. The defense market is also insulated from economic downturns. These make Boeing not only a large-cap stock but also a growth stock and defensive stock.
• Favorable Long-Term Growth Potential: Investing in Boeing adheres to the principles of growth investing with some features of defensive investing. The commercial aircraft market is expected to grow due to the long-term rise in commercial travel. The defense market also has a favorable outlook and remains unaffected by economic uncertainties in most cases due to the established defense budget of countries.
Cons: Boeing Stock Disadvantages
The company might be a global leader but it is without flaws. It has faced several issues concerning its Boeing 707 MAX aircraft. These issues have become public relations disasters. The company also faces tough competition with Airbus in the commercial aircraft market and with companies like Lockheed Martin and Northrop Grumman in the defense market. Some observers have worried about its capabilities to innovate and maintain its market share due to what they have perceived as an erosion of its engineering capabilities. Investing in the company exposes investors to several risks. Below are the disadvantages of Boeing stock:
• Cyclical Nature of the Commercial Market: The market for commercial aircraft tends to be cyclical and sensitive to economic downturns. This also makes Boeing partly a cyclical stock. The revenue stream from the defense market can offset some of the losses from the commercial market during a downturn but this means that the company cannot maximize its earning potential from both revenue streams.
• Significant Struggles and Controversies: Another disadvantage of Boeing stock is that its price can be volatile or experience short-term fluctuations due to publicized issues. The company has figured in numerous public relations nightmares because of production issues and problems concerning some of its aircraft models. These issues affect the sentiments of investors and compel them to dispose of their shares.
• Intensity of the Competitive Environment: Boeing competes with Airbus in the market for commercial aircraft and with Lockheed Martin and Northrop Grumman in the defense market. These companies have their respective competitive advantages. Previous issues have enabled Airbus to gain traction. Lockheed Martin and Northrop Grumman prevent Boeing from cornering lucrative contracts from governments.
• Internal Factors and Management Issues: It has been criticized for being less innovative than it previously was due to its pivot to hiring management-class people who focus on short-term gains while diluting its talent pool of engineers and researchers and ignoring long-term innovative pursuits. The growth prospect of the company now depends on the capabilities of current leaders and their strategic direction.
