In this installment of Using the Value Line Report, we will be looking at aerospace/defense industry stalwart, Boeing Co. (BA – Free Boeing Stock Report). Before we embark on this analytical voyage, however, a brief synopsis of the company’s background may be in order.
Taking a quick look at the Blurb in the center of the page reveals, for those who may not already know, that the company is a leading manufacturer of commercial jet craft. For anyone who has travelled by commercial airline, this may well be common knowledge, as Boeing manufactures some of the most heavily used commercial aircraft in the world, including its more popular 747s. However, many may not know that the company manufactures a slew of military equipment and weapons, satellites and space launch systems, and that it manages the world renowned International Space Station. In fact, we contend that these other less recognized businesses may well prove to be the catalyst that could propel this stock over the long haul.
Needless to say, the company has ascended to great heights since the maiden flight of William Boeing’s first B&W Seaplane back in 1916, when the company was called Pacific Aero Products Co. Almost a century later, Boeing has become the largest aerospace company in the world, based on revenue (complete 2013 data is not yet available, but initial figures suggest that Boeing remains at the top of the pile).
Now that we have familiarized ourselves with the company’s operations, we can examine its investment merits and perhaps determine to which investment strategy the stock would be best suited. With that said, it would probably be most fitting to look at the company’s most recent stock-price performance, as well as its short-term top- and bottom-line drivers and the year-ahead outlook. In that vein, the best place to start would be at the top left corner of the page, where we find the Ranks box. This section lists BA’s Timeliness rank as 4 (Below Average). Given that the rank measures the probable relative year-ahead price performance of this equity against the approximately 1,700 other stocks in the Value Line universe, a 4 would indicate that these shares are untimely and could well lag the broader averages of the equities within our coverage spectrum.
Therefore, it would appear that this may not be the best time to buy BA shares if one is employing a momentum-based near-term strategy. Indeed, a glance at the pricing chart, which is located in the Graph, demonstrates that the stock has zoomed upwards over the past year. In fact, the equity achieved an all-time high of $144.57 back in January (2014), an impressive 73% advance from its 52-week low. However, the stock retreated quite steeply almost immediately following that milestone. A review of the Analyst Commentary provides insight into what may have prompted the sharp and abrupt selloff. Mr. Ian Gendler noted that “We attribute the drop to the announcement that Defense Secretary Chuck Hagel will seek to further reduce the Defense Budget.” Mr. Gendler also goes on to mention that “The issue may also have been affected by profit taking.” Since that pullback in late January/early February, the equity has been somewhat range-bound, trading roughly between $120 and $130 a share. Hence, we reiterate that this stock may not be suitable for a momentum-driven, near-term investment horizon.
Nonetheless, Boeing’s growth prospects are enticing. Indeed, its blue chip designation is well deserved. Moreover, its production pipeline is quite intriguing. Notably, its recent introduction of the 777X at the Dubai Airshow was a huge hit. This wide-body jet offers cutting edge technology (such as 3D printing) and substantial fuel savings. It also has certain designs that should avoid delays. So far, it looks like the 777X is a big hit, as seen at the Dubai Airshow. Boeing snagged about $95 billion in orders from customers in the Middle East, which was twice as much as main competitor Airbus. The company expects to deliver the 777X in 2020. Furthermore, the Middle East represents a considerable growth opportunity for Boeing, especially considering that the region is looking to expand its economies beyond oil, which will require a much better airline infrastructure.
Still, patient investors, employing a buy-and-hold strategy may find these shares lacking, as well. The aforementioned price strength over the past year has probably already discounted most of the revenue and earnings growth we project over the next 3 to 5 years. Scanning the page back up to the top left corner, we find the 3- to 5-year Projections. This projected Target Price Range suggests that, at 40%, the high end of BA’s appreciation potential is merely 1000 basis points or 10 percentage points higher than the current Value Line median (30% as of the date of this article). Although these projections may prove conservative, following a 73% 52-week gain, a mere 40% over the next 3 to 5 years seems a bit paltry in comparison. Therefore, the allure of the company’s global powerhouse status, as well as its exciting prospects for the future, including the technological marvel that is the new 777X, may already be baked into the current quotation.
All told, it would appear that, while Boeing is a solid company with significant conceptual appeal and solid revenue and earnings growth prospects, as well as a respectable dividend, at roughly 26x 12-months earnings per share, the potential for capital gains over the next 3 to 5 years do not stand out. On the other hand, a further pullback in this equity would offer a better entry point.
At the time that this article was written, the author held no positions in any of the companies mentioned.