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Boeing Is Responsible for Over a Quarter of the Dow’s Gains So Far in 2017

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The U.S. equities market continues to head higher, with the Dow Jones Industrial Average closing at a new record high 39 times in 2017, as of September 18. A number of factors have contributed to the rally, including an improved global economy, better-than-expected corporate earnings and excitement over President Donald Trump’s pledge to reform taxes.

Boeing Everett Factory
Inside Boeing’s massive Everett Factory in Washington State, the largest building in the world by volume.
Source: Jetstar Airways, Wikimedia Commons

A lot of gratitude is also owed to aircraft-manufacturer Boeing. The Chicago-based company has added 691 points to the Dow’s appreciation so far this year, more than any other company in the index of the 30 largest U.S. firms.

Put another way, Boeing is responsible for nearly 27 percent of the Dow’s gains year-to-date as of September 18. In second place is Apple, contributing 11.8 percent.

Boeing represents over a quarter of the Dow Jones Industrial Average's Moves in 2017

For the year so far, Boeing is up a remarkable 62 percent, compared to the Dow, up 13 percent.

Boeing driving the Dow Jones industrial average in 2017

Shares of Boeing stock jumped dramatically in July after the company posted strong margins and cash flow in the second quarter, stating it had improved the efficiency of building the 787, its top-selling wide-body commercial aircraft. Compared to the fourth quarter of 2016, Boeing has lowered the cost of production by $6 million per 787.

The company, a major manufacturer of defense and aerospace products, is also poised to benefit from Trump’s efforts to ramp up U.S. military spending. About 30 percent of Boeing’s revenue comes from defense applications, including military aircraft.

Boeing is among the top holdings in the U.S. Global Jets ETF (JETS), which provides investors access to the global airline industry, including airline operators and manufacturers from all over the world.

Boeing and Airbus Profits Rising from Higher Narrow-body Aircraft Demand

As the global middle class continues to expand, demand is expected to grow for smaller narrow-body aircraft, the “primary people movers in airline fleets around the world,” according to Bloomberg’s senior industry analyst George Ferguson.

Emerging countries will try to produce their own narrow-body aircraft—China’s Comac officially introduced its C919 airliner back in May—but a lot of the opportunity will go to industry leaders Boeing and Airbus, also held in JETS.

Boeing and Airbus, headquartered in France, each have a production backlog of over six years, mostly for narrow-body planes. The former’s 737 and latter’s A320 are the most profitable aircraft on the market today, and between the two manufacturers, nearly 10,000 orders are currently on the books. These backlogs, not to mention higher production rates, should help power company earnings and cash flow into the next decade.

According to Bloomberg, Airbus plans to expand production of its A320 from 50 to 60 a month by 2019, a difference of 10 aircraft. Boeing, meanwhile, is expected to increase production of its 737 from 42 to 57 a month, a difference of 15. That translates to 180 additional aircraft a year.

Boeing Takes on Bombardier

At the moment, Boeing is seeking to protect its profits and market share by insisting that the U.S. government impose duties on rival Bombardier’s C-Series aircraft, designed to compete directly with the 737. The Canadian plane-maker has long been accused of relying on “unfair” government subsidies from both the Canadian and U.K. governments. In June, the International Trade Commission (ITC) ruled in Boeing’s favor, saying the C-Series does in fact pose a material threat to Boeing, which is now seeking duties as high as 160 percent of the price of each Bombardier jet.

Understandably so, the drama is testing already-strained trade relations between the U.S. and Canada, with Prime Minister Justin Trudeau threatening to suspend all government purchases of Boeing fighter jets until the company drops its trade complaint.

“We won’t do business with a company that is trying to sue us and put our aerospace workers out of business,” Trudeau said.

The dispute is having repercussions in Northern Ireland, where Bombardier employs about 4,500 people at a factory in Belfast. Concerned that these jobs could be at risk, U.K. Prime Minister Theresa May reportedly asked President Trump to intervene in the Boeing-Bombardier spat. No word has come from the White House yet on how Trump might respond, but his history of putting American companies and workers first suggests he will side with Boeing’s grievances and support the recommended duties.

Whether right or wrong, this would help Boeing continue to price its jets and other aircraft competitively, helping to preserve strong profit margins.

See the top 10 holdings in the U.S. Global Jets ETF (JETS)!

 

Past performance does not guarantee future results.

Cash flow is the total amount of money being transferred into and out of a business, especially as affecting liquidity.

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.

All opinions expressed and data provided are subject to change without notice. Opinions are not guaranteed and should not be considered investment advice.

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