Company Analysis: Boeing - Landing the Argument
The Bull Case:
Sometimes our strengths are also our weaknesses, and vice versa. One at a time, lets look at the issues:
- Rising fuel: Although this is causing the airlines a short term pinch, long term this actually works in Boeing’s favor. In order to be cost effective, airlines will need to reduce their fuel expenses. Since older planes are significantly less fuel efficient, airlines will be forced to upgrade. New Boeing models, particularly the 787, are significantly thriftier on the fuel side.
- Credit Crunch: On one hand, it will end sometime. On the other hand, a large proportion of Boeing’s revenue comes from overseas, so who cares? The emerging economies that prompted this discussion aren’t in a credit crunch and are still spending to fuel growth. Plus, on the IDS side, the major purchaser is the US government.
- Well, the Dreamliner has been delayed, but I think this is pretty much priced into the stock. It remains a significant risk, but ultimately, the plane will get delivered. When it does, Boeing has a staggering backlog of orders (which have actually increased despite the delays) that will last several years.
Additionally, I’d add some other significant positives to the Boeing side:
- Although the Boeing 10-K points out that this is a competitive industry, Boeings big competitor is Airbus. Also releasing its major updated plane in the near future. I actually like these type of duopoly situations (they are easier to keep track of than 9,000 competitors) because it keeps each company sharp, but usually doesn’t add so much competition that both companies become unprofitable. Other competitors such as Bombadier and Embraer may become more of a competitive threat, but it will likely take years, and we should be able to see them coming.
- Again with the Globalization thing – it should drive increased demand from a passenger carrying and cargo standpoint for many years to come. Additionally, with growing economic power in China and India out there – with seven times our population - are we really going to spend less on defense? Just saying.
Valuation:
I looked at valuation two ways. First I looked at current EPS of 5.8 and assumed a growth rate of 10% for the next 10 years. Discounting this at 12%, I calculate a value of approximately $95 as a reasonable price per share.
Second, I looked at Free Cash Flow, which runs around $10 per share. Using the same 10% growth rate, I get a $125 per share price. I think these are extremely conservative assumption based on the potential opportunity in front of the Company.
Conclusion:
I think that Boeing has been beaten down unfairly. There are certainly headwinds that they will face in near term, but I think the long term outlook is extremely positive. I don’t think we are going to stop flying any time soon and I think the global demand is just too compelling to ignore. I think most of the short term concern has been a delay in the 787, but does that really warrant a 40% haircut?!? I think the sale price on this stock is too good to pass up.
In fact, I liked it so much, I already bought some!
I read a lot of reports about aerospace and defense companies published from either bloggers or professional services like Bloomberg and the S&P. All these reports, with no exceptions were concentrated on the commercial aerospace side of the business with no attention at all to the defense side. SPIRI, an international institution dedicated to surveying arms sales ranks Boeing as the largest arm producing company in term of volume, and notes that 50% of it sales are in fact military goods. I am wondering, can any analysis be complete without considering these factors?
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Hi Ohav Ben,
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I think you are right, Boeing’s defense portfolio is so diversified that a termination of a single contract is not likely to pose significant risk. Also, many defense products are produced in partnership with other major contractors - Lockheed Martin, IAI, Raytheon, Northrop Grumman, BAE Systems (and many more) – so that risk is diffused across the industry.
Having said that, we need to recognize that warfare is undergoing a sea change, and so by extension is the defense industry. In some segments we are likely to see some concentration; for example, Lockheed Martin is projected to win over most of the fighter jet segment with the JSF, so successors for Boeing’s F15 and F18 are not likely to emerge. Other segments, like UAV’s, electro-optics, missile defense and Network-centric warfare are expending rapidly. Boeing has a strong showing in missile defense and communication, but in the area of UAV’s and electro-optics they have a very weak product line. Boeing is also one of the lead integrators of the Army’s Future Combat System, an ambitious program with a projected budget of approximately 160 $billion and extends to 2030.
I think the greatest thing about Boeing is that it is naturally hedged. If the world suddenly becomes peaceful and prosperous, growth in the civil aviation business unit will compensate for weakness in the IDS unit. But even if civilian aviation is likely to suffer from war, Boeing perfectly positioned to benefit from any deterioration in peace and stability.
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