A stock answer: think of the future

Execution, future potential are more important than daily price fluctuations

BY JUNU KIM

It's been a tough 2003 on Wall Street. Through March 14, the Dow Jones Industrials Average had fallen 5.8 percent, and the Standard & Poor's 500-stock index has dropped 5.3 percent. Boeing's valuation had been affected by macroeconomic trends that have touched many corporations in America and investors worldwide. Perhaps the most notable factor: Fears about war in Iraq have compounded pre-existing worries about the U.S. economy and the health of the airline industry. As a result, the stock price of Boeing had slipped 22.6 percent through March 14 and recently hit an eight-year low. Share prices of EADS, which has an 80-percent stake in Airbus, have fallen to their lowest level since the company went public in 2000.

On the face of it, that might sound like a lot of gloom and doom. But Boeing executives and key investors who follow the company maintain Boeing's long-term strategy and its ability to execute successfully on those strategies today and tomorrow are far more important factors to consider than daily fluctuations in stock price.

"Like many other major corporations, Boeing's share price has gone down for a number of reasons—from the impact of airline bankruptcies to sector rotation by institutions that hold our stock," said Mike Sears, chief financial officer of Boeing. "Investors and analysts I talk to, however, are really interested in the company's long-term outlook: What are we doing now and over the next few years to run this company, and how will we do so even better in the future than we have in the past?"

"In general, global corporations and consumers feel great unease about the war in Iraq. … As a result, global corporations have cut capital expenditures," said John Vail, senior strategist at Mizuho Securities USA in Chicago. "That in turn slows economic growth and lowers corporate profits, which makes investors move money from stocks into investments seen as more stable, such as bonds."

In fact, through mid-March, investors in 2003 withdrew $11.3 billion from stock mutual funds, according to AMG Data Services. In contrast, bond funds saw a net inflow of $32.2 billion. The implication: By putting money into bonds, investors have signaled that in today's uncertain environment, securing safe mid-single-digit yields generally offered by government and corporate bonds is more attractive than entering a bearish stock market.

Compounding the impact of big picture aviation industry developments, institutional investors—organizations that invest, such as pension funds and mutual funds—recently have sold defense stocks to cash in on short-term profits.

"Most large institutional investors who really drive the marginal pricing of equities are necessarily very short-term-focused, because they're paid according to how well they did that quarter," said Joseph Nadol, vice president, defense and aerospace equities analyst with J.P. Morgan at last month's Strategic Research Institute's 2003 Defense & Aerospace Investor, Supplier and Customer Conference-East. That short-term focus results in trading cycles that distort the stock market, he said.

Market and industry developments may play a part in daily stock-price swings—and tend to garner high-profile media coverage—but they don't ultimately affect Boeing's long-term investment potential, company executives said.

To help drive Boeing's long-term performance, the company remains focused on its strategic plan of running healthy core businesses, leveraging core strengths into new products and services, and opening new frontiers.

The first of these—running healthy core businesses—is particularly important and requires employees to continue diligently improving productivity, contain costs and seek prudent business growth. The financial results of 2002 indicate progress being made in this area. Case in point: Commercial Airplanes last year aggressively resized operations while maintaining solid profitability.

"If you have a plan and perform to it time and again, that goes a long way toward retaining the credibility and confidence of the market," Sears said.

Leveraging core strengths and opening new frontiers refer to ensuring the company is well-positioned for future growth. Leveraging core strengths means applying the company's competitive discriminators to adjacent markets or taking new technologies and applying them to markets and customers Boeing knows well. Opening new frontiers refers to investing in long-term growth by turning visions into business reality.

Boeing has a number of new products and services that hold great promise. The solutions of tomorrow that Boeing is developing include Integrated Battlespace applications such as Future Combat Systems and the Joint Tactical Radio System, unmanned vehicles such as the X-45A Unmanned Combat Air Vehicle, and the 7E7 mid-market commercial airplane project. Indeed, Commercial Airplanes sees the 7E7 as a highly efficient, environmentally friendly e-enabled airplane targeted at a segment with predicted demand of up to 3,000 units in the next 20 years.

"Looking beyond daily ups and downs," Paul Kinscherff, Boeing vice president for Investor Relations, advised, "informed stakeholders understand that our focus on performance, our robust strategies and our outstanding capabilities make Boeing an attractive long-term investment and a company with a tremendous future."

junu.kim@boeing.com