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Boeing is the market's darling

Boeing is one of the hottest stocks on Wall Street.Shares soared nearly 90% in 2017. For an encore, Boeing sur...

Posted: Jan 18, 2018 6:23 PM
Updated: Jan 18, 2018 6:23 PM

Boeing is one of the hottest stocks on Wall Street.

Shares soared nearly 90% in 2017. For an encore, Boeing surged another 16% in just the first three weeks of 2018.

Investors are optimistic about new aircraft orders from major airlines around the globe. That has lifted Boeing's top rival Airbus too.

Shares of Airbus, which trade on the Paris Stock Exchange, are up 10% this year. Last year, Airbus rose 35%.

Boeing has a lot of momentum right now. Wall Street analysts predict earnings surged more than 40% last year. Boeing will report its fourth quarter and full year 2017 results on January 31.

What's more, profit forecasts for 2018 continue to climb. Wall Street now is forecasting earnings growth of 15% in 2018 and an average increase of 17% annually for the next few years.

Those are obviously fantastic numbers. But is all the good news already priced into Boeing's stock? Shares now trade at 30 times 2018 earnings forecasts, a much higher valuation than the broader market. The S&P 500 is trading at 19 times 2018 estimates.

And consider this. Boeing is even trading at a higher valuation than the mighty Facebook. Mark Zuckerberg's social network is valued at 27 times 2018 earnings estimates -- and its profits are expected to rise 28% a year, on average, for the next few years.

But does Boeing deserve to be trading at a premium to Facebook -- not to mention other tech darlings like Google owner Alphabet?

Amazingly enough, many on Wall Street think so. Bank of America Merrill Lynch analyst Ronald Epstein recently boosted his price target on Boeing to $395 a share -- 15% higher than Boeing's current stock price.

Related: Huge order from Emirates for Airbus A380 jets

Epstein argues that Boeing deserves to keep gaining altitude because "aircraft backlog remains solid" and that "strong momentum for the global economy is positive for air travel."

The healthy airline orders for Boeing's 737 MAX 8 and 787 Dreamliner planes are helping to offset sluggishness in its defense business, which reported a 10% drop in sales for the first three quarters of 2017.

The commercial aircraft segment accounts for more than 60% of Boeing's overall sales. In other words, Boeing isn't as reliant on contracts from the Pentagon as many of its big defense rivals.

But Boeing is still set to get a boost from the U.S. government. Cowen & Co. analyst Cai von Rumohr wrote in a recent report that the reduction of the corporate tax rate from 35% to 21% should lift Boeing's cash flow by $2 billion a year.

He added that Boeing's proposed purchase of Brazilian rival Embraer "looks like a great fit" and that even if resistance from the Brazilian government kills the deal, Boeing may still do a joint venture with Embraer and set its sights on other acquisition targets.

Those are some of the reasons why von Rumohr raised his price target on Boeing to $415 a share -- more than 20% above where the stock trades now.

So it seems that there are smooth skies ahead for Boeing. But investors still have to be a little concerned by how far it's gone up in just the past year.

The higher the stock climbs, the greater the expectations become. Boeing's earnings could be phenomenal but still fail to live up to the hype -- and any slip in Boeing could drag down the whole market.

That's what happened in late October when the company reported strong results that still wound up disappointing Wall Street.

Shares fell 3% on the news, sending the Dow down 112 points in the process. That's because Boeing is the biggest component in the Dow -- which ranks companies by stock price, not market value. Boeing makes up more than 9% of the Dow's weighting.

CNNMoney's Jon Ostrower contributed to this report.

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