SIVY ON STOCKS from CNNmoney.com
November 16, 2001

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Boeing in the bargain bin

The airline industry is reeling -- and the leading U.S. maker of commercial
aircraft is down to 11 times earnings.

By Michael Sivy

NEW YORK (CNN/Money) - This year has been a nightmare for the airline
industry. The Sept. 11 attacks showed that a fully fueled airplane is the
handiest terrorist weapon short of a portable atomic bomb. Recurrent
airport security failures and last week's crash of an American Airlines
Airbus A300 shortly after takeoff from New York City's John F. Kennedy
Airport made travelers even more anxious. Air traffic is running at least
10 percent below normal seasonal levels.

In the highly leveraged airline industry, profits are sensitive to even
small changes in traffic. So the current drop-off has devastated earnings.
As a result, airline stocks are down 40 percent since early September. This
miserable business climate has also hurt industry suppliers -- particularly
Boeing, the leading U.S. maker of commercial aircraft, which closed at
$35.00 on Friday, up 76 cents. The company is also having problems in other
facets of its business, such as military contracts. The cumulative effect
has been to drive the stock down to its lowest valuation in nearly a decade.

When Boeing acquired McDonnell Douglas in 1997, the company hoped it was
ensuring a lock on the commercial aircraft market by eliminating a rival.
Since that deal closed, however, the European airplane manufacturer Airbus
has become a much tougher competitor. In addition, Boeing overexpanded in
the late 1990s, leading to a sharp drop in operating margins.

Recently, many airlines have been postponing delivery of planes they have
ordered. Continental, for instance, which has been losing as much as $5
million a day since Sept. 11, is taking delivery of 24 planes but may defer
another 47. And on top of all that, Boeing lost an important military
contract to Lockheed Martin last month.

None of these setbacks is permanent, however. Terrorism can be contained,
and public confidence will return. Despite all the scares of the past few
months, flying is still far less risky than getting in a car. Boeing CEO
Phil Condit acknowledges that the company's business may lag for as long as
three and a half years. But a global economic upturn will revive orders
that have been postponed as airlines eventually have to replace aging planes.

When the upturn comes, Airbus will be able to retain some of the market
share it has captured since it topped Boeing in 1999. But the European
consortium has made a big bet on the very largest planes, while Boeing is
using its military know-how to improve the speed and fuel-efficiency on
regular-size jets that account for a larger percentage of the overall
market. This strategy should greatly improve profit margins even if the
company cedes some share to Airbus.

When Lockheed won the Joint Strike Fighter project in October, Boeing lost
out on the military contract of the decade. The deal could ultimately be
worth $200 billion domestically and more in international sales. But the
Pentagon does not want Lockheed to become the sole viable U.S. aerospace
contractor. So Boeing will likely receive extensive subcontracting
opportunities on the JSF and other smaller defense contracts over the next
few years.

Boeing's earnings for 2001 should rise 25 percent from last year's
depressed levels. But results will slip back some next year as deliveries
are delayed. Even allowing for that dip in profits, Boeing's stock is dirt
cheap. At a current share price of $34, Boeing trades at only 11 times next
year's projected earnings. Even more striking, the stock goes for only six
times cash flow. That's about the cheapest that industrial companies ever
get. Since 1997, Boeing has used some of that cash to purchase more than 12
percent of its outstanding stock. And further massive share buybacks are
planned for the next couple of years.

It's true that a full recovery for this stock could take as long as six
years. But Boeing remains an essential company for U.S. commercial and
military aviation. Even partial progress would move the share price
substantially higher. And ultimately, the share price could easily reach
double or even triple current levels. That's the kind of payoff that makes
a long wait worthwhile.

###

Read all of Michael's columns at:
http://money.cnn.com/markets/sivy/

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