In this article, let's take a look at The Boeing Company (BA, Financial), a $87.15 billion market cap company, which is the largest aircraft manufacturer in the world, and one of the largest aerospace and defense giant that conducts business through three operating segments.
Boeing Commercial Airplanes (61% of revenues in 2013) and EADS's Airbus division are the world's only makers of 150-plus seat passenger jets.Boeing Defense, Space & Security (38%) is the world's fourth largest military contractor. Boeing CapitalCorp. (1%) primarily finances Boeing aircraft for airlines.
Commercial Airplanes
Boeing operates in a commercial aircraft duopoly with Airbus, in a market that Boeing estimates at $5.2 trillion (36,770 aircraft with 15,500 replacements) during the next 20 years. Further, competitors in countries such as Canada and China are a threat in this promising market.
The commercial airplanes segment is getting better due to the increase in passenger and freight traffic. Innovation is expected to strengthen its balance sheet and regain market share.
Production
The production of the 737 has increased, reaching 42 per month in April from the a previous 38 level. The 737 re-engine allows the company to strengthen its balance sheet, for example by offering airlines greater fuel efficiency, while the firm can focus on the development of other aircraft variants. Looking at the 787, the story is the same; it has increased from 10 units each month at the end of last year, from a previous level of 7 during the year.
Defense Segment
This segment contributes to more than a third of the firm's earnings. In order to maintain its profits, Boeinglowered budgets and proactively cut staff. Official Statistics shows that those sectors expanded at good annual rates in the past. However, the history can change due to pressure resulting from high U.S. budget deficits.Total defense cuts could reach $1 trillion over the next nine years to 2021. Defense sector could decline to 26% of total sales in 2018 versus 50% in 2010.
Revenues, Margins and Profitability
Looking at profitability, the revenue growth by 7.47% has outpaced the industry average. Earnings per share increased by 23.2% in the most recent quarter compared to the samequarter a year ago ($1.86 vs $1.56). During the past fiscal year, the company increased its bottom line. It earned $5.97 versus $5.12 in the previous year. This year, Wall Street expects an improvement in earnings ($8.33 versus $5.97).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| BA | Boeing Co. | 38.95 |
| LMT | Lockheed Martin Corp | 80.40 |
| EADSF | Airbus Group NV | 17.75 |
| UTX | United Technologies Corp | 19.93 |
| Industry Median | 12.79 |
The company has a current ratio of 38.95% which is higher than the one exhibit by Airbus (EADSF, Financial) and United Technologies Corp. (UTX, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. For investors looking for a higher ratio, Lockheed Martin Corp (LMT, Financial) is a very attractive option.
It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 17.5x, trading at a discount compared to an average of 19.5x for the industry. To use another metric, its price-to-book ratio of 6.07x indicates a premium versus the industry average of 2.50x while the price-to-sales ratio of 1.01x is below the industry average of 1.16x. These ratios indicate that the stock is relatively undervalued and seems to be an attractive investment relative to its peers.
As we can see in the next chart, the stock price has an interesting upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $26.107, that is a 21.2% compound annual growth rate (CAGR).
Final Comment
Air travel has grown 1.5% faster than GDP over many years. We continue believe about a price appreciation over the next several years as commercial aircraft demand remains strong. International passenger air traffic has grown by an average of 6% annually in the last ten years. However, the defense sector is unpredictable due to uncertainty of the annual government budgeting and also election cycles.
In the last 5 years, sales increased at a CAGR of 7.3%, net income from continuing operations at a CAGR of 11.6%, EPS at 10.3%, and dividends pershare at 3.7%.So in this opportunity, I would recommend fundamental investors to consider this attractive option for their long-term portfolios.
Hedge fund guru Ruane Cunniff (Trades, Portfolio) bought the stock, while others like Joel Greenblatt (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Bill Frels (Trades, Portfolio) and Murray Stahl (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as Manning & Napier Advisors, Inc.
Disclosure: Omar Venerio holds no position in any stocks mentioned
