Company Overview
The Boeing Company (BA, Financial) is involved in designing, developing, manufacturing and selling commercial jetliners and military aircrafts, satellite, missile, defense and launch systems and services worldwide. The company operates in five segments; Commercial Airplanes, Boeing Military Aircraft, Network & Space Systems, Global Services & Support, and Boeing Capital.
In this article I will focus mainly on the company’s Commercial and Defense Segment. The Commercial Airplane segment develops, produces, and markets commercial jet aircraft for various passenger and cargo requirements, as well as provides related support services to the commercial airline industry.
This segment also provides aviation services support, aircraft modifications, spares, training, maintenance documents, and technical advice to commercial and government customers. The Defense segment on the other hand provides manned and unmanned airborne facilities, intelligence and security systems, communications architectures and large-scale integration expertise across several diverse business areas.
With a $33 billion business the segment’s strategy is to understand the needs of the customers and provide solutions accordingly. I believe with increasing geo-political tensions across the world, Boeing defense segment will fetch good contracts in the coming years.
Current Undervaluation
Boeing is currently trading at a forward EV/EBITDA of 8.5 against close peers General Dynamic Corp.’s (GD, Financial) 9.8 and Northrop Grumman Corp.’s (NOC, Financial) 9.3. It is also fairly undervalued against the sector average of 9.4 for the next twelve months.
Also, according to the analyst estimates the company is expected to grow its earnings for fiscal 2014 by 18% and by further 4% in fiscal 2015. However, I believe that the number for 2015 can go up considering good industrial outlook and the market for drones. Thus, for a company like Boeing a PE of 18 looks attractive and fairly undervalued.
Backlogs and Orders Support Growth
2014 has been a successful year for Boeing; the company has record orders and backlogs for the year. In 2014 the net order increased to 1432 from 1355, this includes record delivery of 723 planes from 648 in 2013. Gross order has also increased from 1531 in 2013 to 1550 in 2014.
Also, the primary reason for increase in gains was the result of lesser cancellation of orders. Thus, considering an increase in orders and backlogs of the company I believe Boeing has good growth opportunities coupled with increasing demand for commercial and fighter planes.
Industrial Outlook
According to the Current Aircraft Finance Market Outlook for 2015, the financing market for commercial planes looks strong. It is expected that the aircraft companies will have diverse liquidity from various sources at low prices.
Also, a number of new commercial banks and capital market participants are expected to further diversify the source of financing. This strength in financing is in turn a result of a healthy and balanced global demand of new aircrafts driven by increasing passenger traffic growth and record airline profit.
In addition to commercial planes, I believe defense sector will also witness huge growth and according to me the growth may be in the drone manufacturing sector. This is primarily because of the increasing geo-political tensions which would drive the growth of the defense market since it is a global issue the demand is expected to increase further.
The estimated cumulative spending for the next decade on the drone market is likely to be $98 billion and I believe that Boeing will benefit largely with this increasing demand. Boeing has been developing drones for the U.S market and with its recent hydrogen-powered Phantom Eye drone which can stay at 65,000 feet for up to four days without refuelling; the company has technology to provide many more.
Conclusion
In addition to the strong growth outlook, Boeing offers a dividend payout of $3.64 and a dividend yield of 2.80%, which is sustainable in the coming years. Considering the current valuations, Boeing is a good stock to consider at these levels.
