john@johnducas.com

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Boeing: A Slow Growth Value Play

Boeing (NYSE: N:BA) is a paragon of the prowess of American manufacturing. Ranked 27th on the list of the “World’s Most Admired Companies” with a market capitalization of $95.33 billion, Boeing serves as an example of proper management and solid expansion in a multinational corporation. Founded in 1916, the firm has since expanded and focuses on manufacturing and selling airplanes, rotorcrafts, rockets and satellites. To this point, it has not only become the largest global aircraft manufacture but has also become the second largest defense contractor based on 2013 revenue. Boeing remains the biggest exporter in the United States.

 

In the past couple of months, Boeing has faced significant volatility in its share price, mainly as a result of weakness in the global economy and fear that some of its major contracts will fall through. However, Boeing has remained a solid company that prevails in the global aerospace market. With growth in air travel demand anticipated to double by 2035, Boeing is set to benefit. Thus, thanks to a robust balance sheet and enticing fundamentals, it presents a potential long idea.

 

Boeing Share Price

Boeing Share Price

To determine the intrinsic value of Boeing’s common stock, I’ll be using a DCF (discounted cash flow) model and will be explaining why certain assumptions were made in the calculations. Firstly, based on historical performance, earnings growth has averaged 3%, therefore, in the short run, I expect this growth to continue. Over the long run, too, as the airline industry grows further and as Boeing’s position in the market solidifies, earnings growth should stay roughly equal. Nevertheless, I assumed that growth would begin to fall within the next 20 years.

 

In relation to dividend payments, in the past 7 years, dividend growth has averaged 10%, with most of the increase happening in the past two years. Thus, it is unquestionable that management aims to return earnings to shareholders.

 

There are two parts to the interest (discount) rate variable, risk-free and risk-premium. In relation to risk-free, both the short and long term figures need to be calculated. In the short run, as is indicated by treasury yields, the rate should be about 2.1%. The discount flows in the coming decades are assumed to lie at roughly 5.5% (2030-2040). The figure was derived by breaking down historical fluctuations based on mean-reversion. For the risk-premium value, I will assume a value of 2.8%. This was obtained by looking at mean ROE from 1992 to recent fiscal results and then putting it over the most recent price per share.

 

As a result, based on these calculations and assumptions, Boeing’s intrinsic value per share lies at about $155, which represents upside potential of about 15%.

 

Risks: An important factor to take into account is Boeing’s gargantuan backlog record of more than $490 billion, which is valued at more than 5 times last year’s sales. Given the recent downturn in China’s markets, caution should be paid to this factor. Yet, thanks to the amalgamation of replacement demand coupled with diversification efforts and added to the recent decline in jet fuel prices, which increases customer profitability, many of these issues are quelled.

 

A misstep committed by the company was its share repurchase plan, which it conducted in two instances, before the financial crisis of 2008 and in the past couple of months, two periods that saw share prices higher than their fair market value. Some advice to management would be to focus on increasing dividend payments while lowering reliance on buyback plans.

 

In conclusion, based on the discounted cash flow model conducted, Boeing’s stock is currently undervalued. However, significant risks do pervade as a slowing global economy can have a significant impact on the currently booming aerospace industry and consequently on the company’s operations. Boeing’s current focus on expanding its reach globally, and especially into China, seems like a solid decision as, according to Boeing, Chinese demand alone could top $1 trillion. Although Boeing is by no means a momentum stock, it does present an attractive value proposition (with a meaningful dividend yield) and remains a company with solid fundamentals.