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Boeing (BA – Free Value Line Analyst Report) is one of a handful of important aircraft manufacturers throughout the world. As the Business Using the VL Page_Business DiscDescription notes, it makes (or made) a collection of iconic aircraft, including the 747 and F-15. Note that these two aircraft, perhaps some of the best known in the world, represent the two sides of the company’s business: Commercial and Military/Government. Both are important contributors to the company’s top and bottom lines.

That said, the future for Boeing is clearly tied to the successful launch of its new 787 Dreamliner. This 787 design incorporates a number of new technologies that will allow for both increased size and heightened fuel efficiency. For example, it will be built with light-weight materials that will allow it to use less fuel than other jets, while, at the same time, it will be capable of seating up to about 300 passengers. These attributes should make it more profitable per passenger mile than the company’s other commercial airliners and very appealing to the company’s customers.

These factors have led to a long line of customers awaiting delivery of this new aircraft—as the Analyst Comment highlights, there are nearly Using the VL Page_Analyst Comment850 on order, a massive backlog that will take years to work off. The large backlog suggests many years of revenue to be earned and is a key metric in the evaluation of a large manufacturer like Boeing. The aerospace giant has been under a great deal of pressure to get its new 787 jetliner off the ground and into customers’ hands, but, unfortunately, many delays have occurred. At present, the projected delivery date is for the middle of this year.

Boeing’s promising future revenues are only theoretical until it can successfully make deliveries. Even though most buyers have said they are willing to wait, being forced to wait often brings pricing concessions, so profits can be reduced somewhat because of such delays. In fact, the delays have been something of a drag on the company’s stock for a little while.

Using the VL Page_Historical ArrayThe stock has risen lately, however, due to a recent order from the U.S. government for aerial refueling tankers worth about $35 billion. Part of the enthusiasm about this particular order is because it may lead to additional business, as the current deal will only replace a little less than half of the military’s current 400 strong aerial refueling tanker fleet—which is, on average, about 50 years old. Also, this new order dovetails nicely with strength on the commercial aviation side of the business, where the company is looking to increase its production capacity on some models.

Although Value Line Analyst Ian Gendler expects earnings to dip in 2011, which can be seen in the estimates section of the Statistical Array, longer-Using the VL Page_Annual Rates Boxterm projections are for solid earnings gains. Over the three-to-five year horizon, found to the right of the row headings, earnings are targeted to reach the $7.50 per share range. On an annualized basis, that translates into 14.5% yearly growth in earnings. This statistic can be found in the Annual Rates box on the left side of the Value Line report. This figure is in line with the trailing five-year figure and well above the company’s 10-year history.

Note that revenues are only projected to advance by about 5.5% per year over the three-to-five year span, materially lower than the earnings advance Gendler is expecting. This has much to do with the company’s operating leverage. As noted in the Capital Structure box, the company has a material amount of debt (representing some 80% of its capital structure as of the end of 2010). This helps support the massive infrastructure needed to build airplanes. Using the VL Page_Capital StructureThat infrastructure, however, is fairly static—it is needed regardless of the number of orders. So, when orders are light, these costs (which are, to some extent, fixed in nature) weigh heavily on earnings. When orders are plentiful, these costs are easily covered and earnings get a material boost.

With an order backlog of more than $300 billion, as noted in the Analyst Commentary, orders would appear to be plentiful for years to come. Assuming that the 787 Dreamliner is well received and the government increases its order for refueling tankers, that number could rise materially in the next few years. However, much depends on the Dreamliner being delivered. A big risk to a rosy scenario is that this new plane faces additional production delays. Using the VL Page_Top Label

Boeing is currently trading in line with its historical multiples (trailing P/E) and the market (relative P/E), both figures are shown in the Top Label section of the Value Line report (which, as it’s name implies, runs across the top of the report). This makes it difficult to suggest that the company is undervalued at this point in time. That said, a fairly solid financial position (noting the high level of debt that is inherent to the company’s business model) and good earnings prospects suggest that this could be a solid choice for more conservative investors.

Using the VL Page_Projections BoxGendler’s bottom-line estimate translates into a price target range of $95 to $130 per share over the three-to-five year period. This range can be seen visually to the right of the Graph (the dotted lines) or as numbers in the Projections box. The Projection box also displays the total percentage advance this price range would translate into (30% to 80%) from the price listed in the Top Label. Taking into account dividends, this would provide investors with an annualized total return between 9% and 18% over that span. At the low end this is a respectable figure, at the high end it is a compelling figure—particularly for a company with a backlog that practically guarantees the revenue opportunity Value Line is projecting… so long as management can deliver the Dreamliner.


At the time of this article's writing, the author did not have positions in any of the companies mentioned.