Boeing is Still Cheap

In recent days Boeing has popped higher on news of new orders for planes and continued delays on the Airbus A380 jumbo jet. I think the good news is likely to continue at Boeing as much for the troubles at Airbus as for BA's new CEO, James McNerney. McNerney has a pedigree that is hard to match, having had stints at P&G, GE, MMM, and now Boeing. If he lives long enough, he may be the first person in history to manage all 30 of the companies in the Dow Jones Industrial Average. In this case, however, it is not his impressive pedigree that portends continued success at BA but his unique success at MMM. When McNerney joined MMM, it was a wonderfully innovative company that many investors had soured on because the company had a history of discovering great products that either fizzled or were copied by other companies that could produce and market the products more profitably. MMM had many wonderful innovations slip through their fingers because their product list was so long and ever increasing, and they never got around to betting and backing the right horses in their stable. At MMM, McNerney built consensus around the idea of "commercialized innovation." In some ways, it was really very simple. He sold the employees on narrowing their focus to a smaller list of innovative products that had sustainable profit potential and barriers to entry. In addition, he reduced redundant layers of management and put a quantitative tracking system in place that measured all the bets. Wall Street applauded his initiatives and the stock moved higher. Boeing is a tougher nut to manage than MMM because of its huge capital commitments and the winner-take-all nature of the commercial and military aerospace industries. Additionally,Airbus, its only other viable competitor, has the backing of the governments of Germany, France, and Spain. BA has won many contracts and made deals at the four corners of the earth, but they have not consistently given back much to their investors. Indeed, operating earnings for 2005 were about the same as they were in 1991. I think McNerney is the right person for one of the most important jobs in the world, because he is a consensus builder, and he knows how to allocate capital, having learned this from the master, Jack Welsh, while at GE . I believe McNerney will lead BA much the same as he did MMM, by consensus and focus. There are too many layers of management at BA, but what's worse is that there are too many "princes" who believe that their view should be the company's view. No company stands to gain more from the global economy than does BA, but it cannot continue as many little companies within a company. I believe McNerney can convince most of the"princes" that their kingdoms will prosper if the stock price continues to go higher, and the stock price will go higher if the company is able to do a better of job of allocating its capital and has a better focus on the bottom line. Those princes he is not able to convince will probably be looking for employment elsewhere very fast. If you want a powerful way to think about Boeing it is this: Boeing has what amounts to a toll road across every continent and ocean in the world. I am not completely ignoring Airbus. It is a strong company, but a focused, disciplined strategy by Boeing will be nearly impossible for Airbus to compete with. It has two CEOs, it is sponsored by three European governments, and is a subsidiary of another publically traded company, EADS. Where Boeing has princes, Airbus has kings. In this regard, I think the better bet is against the kings, espescially with Jim McNerny on our side. I think the stock may be 15% undervalued. We own BA in our Capital Builder style of management. Please see terms and conditions of this website on the sidebar at the right.