Why The Boeing Company Could Sparkle Your Portfolio

Author's Avatar
Mar 15, 2015

The Boeing Company (BA, Financial) is one out of the two major aerospace companies of the world, the other being Europe’s Airbus (EADSY, Financial). The Chicago based jet maker has been a delight for investors all through, offering superb return on equity and invested capital. Even dividend per share has consistently improved over the years and reached $2.92 a share in 2014. Last year it bagged as many as 1,550 gross orders and delivered a total of 723 jets. So far this year the company has bagged net orders for 74 jets and has delivered 113 aircraft, and plans to deliver a total of 750 to 755 jets during the full year. All this suggests the company is a robust one in the aerospace and defense sector, and has been keeping its investors happy. But is that all to decide if the company is a worthy investment?

03May20171136581493829418.jpg

Turning to the fundamentals
The fundamental to investing in a stock is to understand the value it offers and the price it charges. Legendary investor Warren Buffet believes strongly in two concepts while investing is a stock – intrinsic value (or fair value) of the stock and margin of safety. In a lay man’s language, intrinsic value is the amount of money that an investor can take out of the company in its life time, and margin of safety is the difference between the intrinsic value and the current stock price, expressed as a percentage on intrinsic value. So, if the intrinsic value of a stock comes to $100 and the stock is trading in the exchanges for $80, we can say the margin of safety is 20%. This also implies the stock is trading at a discount of 20%.

Based on historical performance, we calculated the expected growth rate for Boeing which came to 12.5% yearly for 10 years, being conservative, and we assumed the terminal growth rate to be 11%, and a discount rate of 10%. With these figures in place, we performed a discounted cash flow calculation and the intrinsic value of the stock came to $181.81 a share. This compared to Boeing’s current stock price of $151.57 suggests a margin of safety of 17%.

03May20171136581493829418.jpg
Source: GuruFocus

Investment rationale for Boeing
Several investors may find the 17% margin of safety to be inadequate and would usually prefer stocks with a minimum margin of safety of 25%. However, the point to keep in mind is, there is no minimum threshold that must be met while looking at margin of safety. The qualifying value, i.e. the value that’s adequate for one to invest in the stock, depends upon a host of factors, such as how well the company is positioned in the industry, how it stands compared to peers, the future potential of the company in the industry and the industry as a whole.

If we look for answers to the above questions we will arrive at the conclusion that Boeing is a robust player in the space with a bright future. That being the situation, a very low margin of safety also bodes well. MoS of 17% definitely is encouraging and adequate for a long-term investor. Yahoo Finance has a high target price for $196 set for the aero major, and out of 24 analysts, nine have a strong buy rating on the stock, six have a buy rating and eight have a hold rating -- that’s 96% of the analysts in favor of Boeing and believing in the stock’s upside potential. With strong fundamentals and even stronger business prospects, the aero major seems to be a good stock to have in one’s portfolio.