In this week's episode of Industry Focus: Energy, host Nick Sciple and Motley Fool analyst Jason Hall dive into the incredibly profitable world of yieldcos. Tune in to find out what yieldcos are, how the business model works, how they're able to pay out so much in dividends, what to know about the tax implications, and a basket of picks you might want to add to your watch list for some low-risk, high-reward renewables exposure.
Learn more about the pros and cons of Brookfield Renewable (NYSE:BEP), TerraForm Power (NASDAQ:TERP), NextEra Energy Partners (NYSE:NEP), and Pattern Energy (NASDAQ:PEGI), and which one looks most attractive right now. Plus, the hosts talk about the future of Boeing (NYSE:BA) as an investment, and what effect the 737 tragedies will have on the company's long-term picture.
A full transcript follows the video.
This video was recorded on March 14, 2019.
Nick Sciple: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, March 14, and we're talking energy and industrials. I'm your host, Nick Sciple, and today I'm joined by Motley Fool contributor Jason Hall via Skype. How are you doing, Jason?
Jason Hall: I am fantastic! It's good to be back on! It's been a little while, I think this is the longest gap in shows that I've had in a little while. It's good to hear your voice!
Sciple: Yeah, Jason, we haven't chatted since around the new year. It's good to catch up with you. We've got a lot of news this week. We're going to give our listeners a preview on how to handle their taxes as we approach the dreaded tax day, April 15. And we're going to talk about some of our favorite yieldcos. These are companies we've talked about a lot on the show and some of our listeners had asked us to talk about some of our favorites, so we're going to do that.
But first, Boeing is in the news this week. There was a second tragic crash of the 737 Max aircraft on Sunday that occurred in Ethiopia shortly after takeoff, tragically killing all the passengers on board. The pilot had cited issues with the plane's controls leading up to the crash. In the ensuing aftermath, the 737 Max has now been grounded by Boeing following a large number of groundings from countries as diverse as the U.S., China, and India. Shares of Boeing are down nearly 12% this week on the news.
Jason, how should investors be approaching this uncertainty around Boeing and this latest tragedy from this airplane?
Hall: First, obviously, this is tragic, what's happened. You think about these kinds of things, two planes crashing on the other side of the world. We actually have a colleague who had a friend who was killed on this latest crash. It kind of comes home a little bit when that kind of thing happens.
Looking at it just as dispassionately as possible, frankly, I don't see this as a catalyst for investors that are value-hunting to try to look at this as a great opportunity to buy Boeing. If you think about this from a pure valuation perspective, Boeing shares were pretty much at their all-time high in late February. So, not too long before all this happened, this stock was at its all-time high. If you go back to Christmas Eve, the low point for stocks over the past decade, really, shares are still up 27%. We're talking less than three months, Boeing shares are up 27% still. That's after losing what 15% from the high.
I don't think we're talking about a stock that I would necessarily be running out to buy on this, like it's really cheap right now. If you think about it from a pure earnings valuation perspective, right now, shares trade for almost exactly 21 times trailing earnings. I'd say that's probably fair value for Boeing, with no overhang like the 737 Max potentially represents. It was trading for 25 times earnings three weeks ago. If you look at it in the aerospace industry, look at it for defense contractors -- usually, that's the two areas where it makes a living -- it's an expensive stock, and it generally always is because it executes so well.
Now, thinking about it from the longer-term perspective, if this is a stock that you bought six months ago, three months ago, five weeks ago, I can't say that I think this is really a catalyst to necessarily sell. One of our colleagues, Adam Levine-Weinberg, who writes a lot about airlines and the aerospace industry, pointed out really well just a couple of days ago that the 737 Max, airlines don't really have any other alternatives. The Airbus A320 is the other similar narrow-body aircraft that airlines are buying, that's similar to the 737 Max. They have a backlog that's like five years at their maximum output capacity, which is like 750 planes a year. They can't build anymore. It's not like airlines that are lined up for the 737 Max have somewhere else they can go to buy jets that they need for their operations.
The other thing, too, you go back not too long ago, four or five years ago, the 787 Dreamliner. I don't know if you remember, Nick, the lithium ion battery problems they had. The fleet was grounded. These lithium ion batteries were catching on fire on the planes. Obviously, I don't want to compare that situation to two jets that have crashed and killed hundreds of people, but it was a severe concern that planes would spontaneously catch on fire in the air. It was quickly corrected. That 787 has been a very successful plane.
I think over the long term, Boeing is going to address this, they're going to get it taken care of. The business should be fine. I just don't see this as a catalyst to necessarily jump in and buy, or even to sell, as far as that goes.
Sciple: Yeah, Jason, I agree with you completely there. It's kind of a wait-and-see position here. The 737 Max, the numbers that I've seen are that that aircraft represented nearly a third of Boeing's profits. Boeing had been expecting the 737 Max to make up maybe 90% of its deliveries in 2019. So, of course, in the near term, that's a really significant cloud over the stock, as we see how Boeing can resolve the safety issues with the plane. If course, if this ends up being something they can fix over the air with the software update, it could be just a little bit of a speed bump for the company. But if this is something mechanical, and you have to do a full redesign, that can really weigh on earnings for a long period of time.
But really, when you look at the company over the long term, as you mentioned, Jason, when we look at these large passenger aircrafts, it's really a global duopoly between Boeing and Airbus. That dynamic is not going to change based on this recent news. As you said, we'll have to see how the 737 Max safety concern gets shaken out over the next weeks and months. That's going to be definitely a near-term cloud over the stock. But the global environment for aircraft is still bullish over the long term, and the competitive environment hasn't been changed significantly by this. Any thoughts before we move on, Jason?
Hall: No, I agree. I agree 100%.
Sciple: Awesome! Well, Jason, now I want to talk a little bit about, before we get into our discussion on yieldcos, we've gotten a couple of listener questions about schedule K-1 taxes. We've spent a decent amo
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