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Using the Value Line Page: Boeing September 17, 2010
Boeing (BA – Free Analyst Report) is currently working on what some consider a revolutionary new aircraft—the 787. The plane’s design incorporates a number of new technologies that are likely to appeal to the company’s customers. For example, it will be built with light-weight materials that will allow it to use less fuel than other jets. Moreover, it is larger than any other plane on the market today, which should make it more profitable per passenger mile than the company’s other commercial airliners. (A free copy of Value Line’s report on Boeing, for use with this article, can be found here.)
These factors have led to a long line of customers awaiting delivery of this new aircraft—as the Analyst Comment highlights, there are nearly 850 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 evaluation a large manufacturer like Boeing. Unfortunately, there have been many delays in converting this backlog into revenue. In fact, Boeing has been under a great deal of pressure to get its new 787 jetliner off the ground and into customers’ hands, even though most buyers have said they are willing to wait. (Note that waiting often brings pricing concessions, so customers actually benefit somewhat from such delays, as analyst Morton Siegel notes in his Comment.)
In the end, the ongoing delays have given the company something of a public relations “black eye” and has depressed the stock price somewhat. For investors, the negative view of the company might be a buying opportunity, assuming, of course, that the new aircraft is as revolutionary as some expect. In fact, Value Line’s projections out to 2013-2015 call for material upside for the shares. This can be seen in the Projections box to the left of the graph, where a price range of 100 to 140 is implied by the long-term projections in the Statistical Array. This price range corresponds to a share price advance between 60% and 120%. Including dividends in the mix (as seen in the Top Label, the shares currently yield almost 3%) suggests an average annualized total return of between 14% and 24%. These are impressive numbers, even if the price and returns only reach the low end of our projections.
Looking more closely at the Statistical Array, our projections call for earnings in the $8.00-a-share range over the three- to five-year period. On an annualized basis, that suggests a 15% yearly advance over that time period, as can be seen in the Annual Rates box on the left side of the page. Based on the company’s comparatively low score for Earnings Predictability, a proprietary Value Line metric, however, it’s unlikely that earnings will arrive in a smooth fashion. Earnings Predictability can be found in the Ratings box at the bottom right of each Value Line report. Since much of the advance Siegel expects is to be driven by the new, but delayed, jetliner, the uneven earnings pattern is likely to persist—at least until the new plane starts to be delivered. Subscribers should pay close attention to the Analyst’s Comment for news on the 787’s delivery.
It is important to note that shares of the company aren’t particularly cheap at current valuation levels. With a relative P/E of 1.12, it’s trading at a premium to the broader market (the relative P/E can be found in the Top Label section of the page). Comparing this level to the historical information in the Statistical Array shows that this premium isn’t unusual, but also that much lower P/E levels have been seen—especially in 2001 and 2002. These statements can be said of the P/E, as well. So, while the share price has exhibited some weakness of late, and there appears to be a substantial amount of upside potential, some of that potential is clearly recognized by the market. Investors should, thus, pay close attention to price action when looking for buying opportunities.
Boeing, however, is far more than just a commercial aircraft manufacturer, as one can learn by reading the Business Description on the Value Line report and other articles on valueline.com. Although the commercial aviation business accounted for about 50% of revenue in 2009, the other half of the business is engaged in the production of military aircraft (including the F-15, C-17 cargo carrier, and the V-22 helicopter), network and space systems (such as the E-6 submarine communicator and work it has done on the space station), and services and support businesses (which provides maintenance, training, upgrades, and logistics support for many military platforms and operations). So, in effect, the company is half commercial aircraft manufacturer and half military contractor.
The company also has a finance arm that represents about 1% of revenues, though this understates the importance of the unit. Indeed, helping to find financing for the company’s usually expensive products is a key support to its overall business.
So, while the results of the commercial aircraft component of the business are key to the company’s earnings outlook, there are other divisions that play a role in the strength, or weakness, of earnings. Thus, price fluctuations can also be attributed to government contracts, which tend to be irregularly awarded, though earned out in a much smoother fashion. Although much of the news, and our report on the company, focuses on the issues surrounding the new jetliner, Boeing’s military business is likely to hold its own, even if military spending declines in the years ahead.
This positive outlook for the military side stems from the high barriers to entry for the products this company provides to the armed forces. Of course, similar barriers exist on the commercial side, too. These facts, plus the large size of both halves of the business, help to explain the company’s high marks for Financial Strength (found in the Ratings box) and Safety (found in the Ranks box at the top left of the page), despite its large debt load (this can be seen in the Capital Structure box).
For many companies, debt amounting to about 85% of total capitalization would be a significant warning sign. Boeing’s business, however, requires a material manufacturing infrastructure. The long-term nature of many of its contracts and high costs of its products can easily support such high fixed expenses. Indeed, despite the ups and downs of its business, the company hasn’t posted a full-year loss in well over a decade, as can be seen by reviewing the historical component of the Statistical Array.
Trading at what appears a reasonable price, Boeing has the financial strength and business potential to reward investors once its new aircraft start taking off.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.