In this article, let's take a look at The Boeing Company (BA, Financial), a $91.63 billion market cap company that is the largest aircraft manufacturer in the world and one of the largest aerospace and defense giant conducting business through three operating segments: Boeing Defense, Space and Security (38%) is the world's fourth-largest military contractor, and Boeing Capital Corp. (1%) primarily finances Boeing aircraft for airlines.
A potential industry
The company designs and tests the product and provides support. These activities involve specific knowledge that it is difficult to copy from new players. Many competitors have disappeared, and today 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.
We still believe in an increase in passenger and freight traffic which would benefit the commercial airplanes segment. This growth is based on higher production rates. Production for the 737 is 42 per month in April and for the 787 are 10 units each month. Innovation is always a key driver in this type of industry, offering airlines greater fuel efficiency, while the firm can focus on the development of other aircraft variants.
With respect to the Defense Segment, it contributes to more than a third of the firm's earnings. In order to maintain its profits, Boeing lowered budgets and proactively cut staff. Total defense cuts could reach $1 trillion over the next nine years to 2021. The defense sector could decline to 31% of total sales in 2015 versus 50% in 2010.
CAGR
In the last 5 years, sales increased at a compound annual growth rate - CAGR of 7.3%, net income from continuing operations at a CAGR of 11.6%, EPS at 10.3%, and dividends per share at 3.7%.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $29.445, which represents a 24.1% compound annual growth rate (CAGR).
Revenues, margins and profitability
Looking at profitability, revenue grew by 7.47% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.86 vs $1.51). 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 ($8.35 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 | 19.33 |
| Â | Industry Median | 12.79 |
The company has a current ROE of 38.95% which is higher than the one exhibit by Airbus (EADSF, Financial) and United Technologies (UTX, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Lockheed Martin (LMT, Financial) could be the 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 18.4x, trading at a discount compared to an average of 21.0x for the industry. To use another metric, its price-to-book ratio of 6.3x indicates a premium versus the industry average of 2.59x while the price-to-sales ratio of 1.1x is below the industry average of 1.17x.
Final comment
Air travel has grown 1.5% faster than GDP over many years. We still believe price appreciation could be reachable 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.
So in this opportunity, I would recommend fundamental investors to consider this attractive option for their long-term portfolios.
Hedge fund gurus like Ruane Cunniff (Trades, Portfolio), 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 first quarter of 2014, as well as Manning & Napier Advisors, Inc.
Disclosure: Omar Venerio holds no position in any stocks mentioned
