Boeing Stock Looks Overpriced

As one of two leading manufacturers of commercial jetliners in the world and the second largest defense contractor in the country that spends more than any other on its military, Boeing is one of the jewels of American industry.  An anchor of the U.S. export economy, and a member of the Dow Jones Industrial Average since 1987, it’s consistently considered one of the best-managed and most admired companies in the world.

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Over the last five years, BA has rewarded investors handsomely.  From 2009 through 2013, Boeing stock generated a total return – capital gains plus dividends – of 244 percent, for an average return of 28 percent per year.[1]  Fueling that surge was an average annual growth in earnings of 12.3 percent, rising dividends – from $1.68 a share in 2009 to $1.94 in 2013 – and P/E expansion.  During the period, the stock soared, from a low of about $25.74 in March 2009 to $134.97 by the end of 2013, before going on to its all-time high of $140.54 this January.

But it’s not like BA never has a down cycle.  Despite the boost in its defense business from two wars in the first decade of the 21 century, the global financial crisis and Great Recession took their toll on the airline business and its suppliers. BA’s stock price plunged from nearly $91 a share in mid-2007 to that $25+ mark in 1Q09 I just mentioned – a decline  of more than 70 percent – after 2008 revenues fell by about 10 percent and earnings per share shrank in that same year by 31%.

And then there was the recession of 2001, which sent BA tumbling from a high of $5-and-change to a low of $20.27 on March 31, 2003, for a capital loss of 60 percent.  Underneath the stock performance was 16 percent decline in earnings in from 2001 to 2002, and a $4 billion (7 percent) drop in revenue.

Coming into 2014, things were looking good for the company.  Buoyed by global economic growth – albeit sluggish – and a need for airline companies to upgrade to more efficient planes, it achieved record revenue of $86 billion, and posted a handy 17% increase in earnings per share (to $5.96), while boosting dividends again last year to an annualized $2.92. But even as it announced those glittering results, it lowered its guidance for 2014. Analysts’ consensus was $7.57 a share, and Boeing forecast $7.00 to $7.20.  The announcement pushed BA shares down XX percent, to $129 and change.  On a total return basis, through the first six months of 2014, the stock generated a negative total return of 8.8%.

There’s nothing really wrong with Boeing’s fundamentals.  Financially, the company is in great shape. Yes, the global economy continues to grow at a sluggish rate, and there’s pressure to put a lid on military spending to help close the federal budget gap, but Boeing relies on its defense, security and satellite (read, government) business for just 37.5 percent of its revenues.

The problem is valuation:  it’s historically high, and with lowered growth expectations, it’s difficult to see how Boeing is worth its late-June share price of around $130, where it’s trading at 22-23 times earnings, well above its average multiple of 16-17 for the last 5 years.[2]  In fact, BA is trading at the highest trailing PE in the diversified aerospace sector, where United Technologies trades at 18.7 times earnings, Lockheed Martin at 16.8, Raytheon at 14.6 and Northrop Grumman at 13.5.

Then take into account that the consensus estimate is that Boeing’s earnings will grow by 10.4 percent a year over the next five years, compared to the 12.3 percent rate at which they grew over the last five years, and you’ve got prescription for just the kind of share downdraft BA has suffered so far this year. The risk is that the PE will contract further, and the stock price will go lower with it.

I love Boeing, the company.  Even though it’s got a modest dividend yield of 2.2%, the company generates 3 to 4 times the free cash flow it needs to maintain it, and it has a history of raising dividends.   But I don’t like to pay unreasonable amounts for growth, and BA’s PEG ratio (P/E to Growth Rate) of 1.68, says “Sell.”  At the current five-year earnings growth estimate, I wouldn’t be a buyer until the PEG ratio fell to 1.20, which converts to a price of $103.  If estimates for future growth were to increase, I’d take another look.

[1]   All total returns calculated at http://www.buyupside.com/stockreturncalculator/stockreturncalcinput.php  [2]   http://www.chicagobusiness.com/article/20140103/BLOGS10/131239972/local-stocks-face-2014-with-a-case-of-vertigo


About Lawrence Meyers
 lawrence meyersLarry is regarded as one of the nation’s experts on alternative consumer finance. He consults for hedge funds and private equity via his Council Member status at Gerson Lehman Group, and as a member of Coleman Research Group’s Executive Forum. He also consults for Credit Access Businesses and Credit Services Organizations in Texas. His Op-Eds and Letters to the Editor have appeared in over two dozen major newspapers. He also brokers financing, strategic investments, and distressed asset purchases between private equity firms and businesses of all stripes. You can reach him at pdlcapital66@gmail.com.

 

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