However, even with government aid, Embraer is unable to earn an economic profit above its cost of capital. The company has already cut costs to the bone and reaps benefits from making airplanes with common parts. But the company’s cost-saving initiatives have left it without a comprehensive fleet offering, which makes it difficult for the company to sell entire fleets to corporations looking for a one-stop shop.
Lockheed Martin Corporation (NYSE:LMT)’s outsized profits stemmed from overseas conflicts; it is unclear whether these will persist in the years to come, but experience suggest that it will. Meanwhile, Embraer’s low return on capital is primarily due to its reliance on the cyclical regional jet market. It is quite likely that the conditions hampering Embraer’s profitability in the past will continue to exist for decades into the future. Therefore, investors should expect similar returns on capital in the future.
A different situation
But while Embraer earned low returns in the past and will continue to do so in the future, and Lockheed Martin Corporation (NYSE:LMT) earned high returns in the past and may or may not do so in the future, Boeing’s above-average returns of the past are likely to persist in the future.
As one of the most innovative aviation firms in existence — and with significant bargaining power with both customers and suppliers — Boeing has been able to average double-digit returns on capital over the last ten years.
However, investors are concerned about Boeing’s loss of market share in the fighter jet market to none other than Lockheed Martin Corporation (NYSE:LMT). Luckily, Boeing’s nearly-$400 billion backlog — almost five years worth of sales — secures the company’s outsized profits for at least half a decade.
The Boeing Company (NYSE:BA) is in a much better position than a company like Apple. Whereas Apple needs to come up with new products and make them affordable, Boeing simply needs to continue its low-cost manufacturing and deliver on already-signed contracts with customers. In other words, it just needs to execute to earn outsized profits.
Bottom line
The Boeing Company (NYSE:BA) does not have a durable competitive advantage that secures its above-average profitability for decades like Coca-Cola has, but it does have a history of superb execution that makes it likely for above-average profits to continue rolling in for years to come. Investors who own Boeing are part-owners in a company that receives $0.15 in annual profits for each dollar it invests — a recipe for shareholder value creation for years to come.
Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends Embraer-Empresa Brasileira. The Motley Fool owns shares of Lockheed Martin.
The article Superb Execution Makes This Stock Attractive originally appeared on Fool.com.
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