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As a pilot, I'm fascinated with all things related to aviation. I'm particularly fascinated when iconic American aircraft builders like Boeing (NYSE: BA) take great strides to disrupt a highly regulated industry.
Believe it or not, innovation is relatively muted in the aviation industry. With a focus on safety, dependability and longevity comes a lot of red tape. Many of the aircraft flying today have changed little from 30 years ago, excluding some advances in technology, weather detection and GPS.
Innovation means pushing the boundaries of engineering, overcoming opposition and, unfortunately, dealing with failures from time to time. I believe Boeing's minor setbacks earlier this year will prove to be trivial stumbling blocks and shares will move much higher.
At the heart of this story is the Boeing 787 Dreamliner. While it has been the butt of many jokes, the early production problems may be a key factor in our ability to profit from the stock.
Boeing started the year off on the wrong foot as headlines stoked ongoing fears about the aircraft's battery system when smoke was seen billowing from a 787 owned by Japan Airlines.
A year prior, an All Nippon Airways 787 jet made an emergency landing when the main battery overheated, causing a burning smell in the cabin. Shortly after the incident, all 787s were grounded globally in an effort led by the U.S. Federal Aviation Administration (FAA). At the time, Boeing had delivered 50 planes to eight airlines in seven countries, with orders for more than 800 Dreamliners on the books from airlines around the world.
The grounding lasted for more than three months while Boeing redesigned the faulty systems. What's ironic about this situation is that the FAA must certify and approve every nut, bolt and component on every aircraft. So, in my humble opinion, they are just as liable as Boeing.
When concerns were heightened again at the beginning of this year, the stock plummeted 18% from a 52-week high near $145 to just below $119 in a matter of weeks. This presented a phenomenal deal for traders brave enough to buy in the face of the negative headlines.
Fast-forward a few months and BA is not only recovering nicely from a technical perspective, but the news flow has been quite positive.
Last week, the twin-engine 242-passenger 787-8 was approved for longer duration transoceanic flights, while previous models were only approved for shorter distances. This should be a big sales and confidence booster for Boeing, and I think investors have yet to realize the potential positive impact. The company hopes to secure approval for the 280-passenger 787-9 to fly longer routes later this year once it receives FFA certification.
Aside from the 787, Boeing's bread-and-butter business also looks promising. It sold 50 737 aircraft to China's Juneyao Airlines last month. It also recently entered into talks with Emirates to sell them fuel efficient 747-8 jets to replace some of their gas-guzzling Airbuses.
BA is trading at 18 times forward 2014 estimates and just 16 times 2015 estimates. The next quarterly earnings announcement is due out July 23. The company has beaten the Zacks consensus estimate for the past four quarters, including a 14% beat in the most recent quarter amid all the Dreamliner issues.
Most analysts have already built in a major charge to Boeing's 2014 earnings on the battery woes. So as long as there are no more surprises, analysts are being very conservative.
In the first quarter of 2014, Boeing said it delivered 161 airplanes, which was a 17.5% increase over same period in 2013. The most recent durable goods data reflected similar trends, as strength in transport and manufacturing buoyed the better-than-expected report.
From a technical perspective, BA remains in a clear bullish channel and is firmly above its 20-day, 50-day and 200-day simple moving averages (SMAs). Note that the 200-day represents strong support, as it was not broken even during the battery debacle earlier this year.
The stock is slightly overbought here, so I'd expect a pullback. As we're considering our trade, we're going to let the stock come to us rather than reaching for it.
BA Call Option Trade
Today, I am interested in buying BA Nov 130 Calls for a limit price of $9.30. If the price of BA drops slightly in coming days, as I suspect it will, we should be able to get this price.
Risk graph courtesy of tradeMONSTER.
Since I'm putting a fairly large emphasis on the fundamentals here, I opted for the November expiration. This should give us plenty of time for the trade to work out and allow for two earnings reports to act as catalysts.
This call option has a delta of 66, which means it will move roughly $0.66 for every dollar that BA moves, but it costs a fraction of the price of the stock.
The trade breaks even at $139.30 ($130 strike price plus $9.30 options premium), which is 2.5% above current prices.
I believe Boeing will at least revisit its 52-week high of $144.57 and maybe see a breakout to the $150 area.
For our stop-loss, we are going to use the 200-day SMA. If BA moves below it, we will close the trade. Alternatively, if the stock is not trading above $130 by Nov. 1, we will close the trade and salvage what premium we have left.
Recommended Trade Setup:
-- Buy BA Nov 130 Calls at $9.30 or less
-- Set stop-loss to trigger if stock crosses below 200-day SMA or is not above $130 on Nov. 1
-- Set initial price target at $14 for a potential 51% gain in 3-4 months
-- Sell three-quarters of position if initial target is met
-- Set secondary price target at $18 for a potential 94% gain in 3-4 months
If you have a question or comment about today's strategy, please send it to firstname.lastname@example.org.
Many investors hold strong opinions about the 200-day MA... but is it actually important?