Boeing (BA) reports its calendar Q4 '12 before the bell on Wednesday morning, January 30, 2012. According to ThomsonReuters, analyst consensus is looking for $1.19 in earnings per share (EPS) on $22.3 billion in revenue for expected year-over-year growth of -11% and 14% respectively. Analyst consensus for 4th quarter revenue and earnings per share has been revised up slightly since the October '12 earnings report.
In the 3rd quarter, revenues rose 8% while EPS fell 8%, even with solid Commercial Airspace (CA) results: CA revenues rose 28% while operating profit rose 6%. Boeing Defense Systems saw revenues fall 4% on flat operating profit. Excluding the dividend, BA's stock rose 2.7% in calendar 2012.
- First column - month end
- Second column - analyst consensus EPS estimate for 2012
- Third column - analyst consensus EPS estimate for 2013
- Fourth column - consensus revenue estimate for 2012
- Fifth column - consensus revenue estimate for 2013
As the reader can quickly deduce, BA's expected 2013 EPS growth has slowed as we moved through 2012, even as 2012's EPS estimate has moved steadily higher. Revenues estimates have also moved higher for 2012 and 2013 by 3% and 3% respectively.
Commercial Airplanes is Boeing's largest segment comprising 50% - 65% of BA's total revenues and about the same percentage of operating profit. CA's profit margin has varied fom 8% - 10% the last three years. Over the last 3 years, CA's revenue growth has averaged 13% while operating profit growth has averaged 9% respectively.
Boeing Defense Systems (BDS) is the remainder of BA's revenue and operating profit, split between BA Military Aircraft, Network & Space Systems and the Services Business. Over the last 3 years, BDS's revenue growth has averaged 5% while operating profit growth has averaged a -3% decline during the 12 quarters.
What worries up about the 787 and the battery issue is that with BDS contributing less and less, and in fact with very subdued growth expectations under the current Washington Administration, CA is now bearing the entire Boeing operational burden, which would have been ok, as long as the 787 didn't keep running into problems.
Although trading at 9(x) cash-flow, the two compelling aspects to BA's valuation is the 7% free-cash-flow market cap as of Sept. 30th, and the 0.77(x) price-to-sales ratio on BA. We ultimately think BA is worth $100 a share, or about 30% higher from its current price, but to get there, we would need BA's gross margin to move back toward 20% (16.1% last quarter), the operating margin move back to 10%, and (obviously) the 787 issues put behind the company. BA peaked in 2007 at $100 per share, as operating margin moved over 10%.
So far, at least in terms of what was read on BA's battery issues, the regulators are not finding any material defects. (There was an article in the New York Times over the weekend wondering whether BA was pressured by Japan to buy the battery from a Japanese manufacturer, given the 787 orders BA was seeing from Japanese airlines, but so far that is pure speculation. ) If we would classify BA in terms of whether it was an early or late-cycle stock, we would say BA was a way to play mid to late-cycle global growth.
Another factor which has negatively impacted BA's financial results the last few years is pension expense and the generational low level of interest rates. Suffice to say, higher rates would help. The attached chart shows BA's uptrend is still intact off the '09 and 2011 lows, but we remain nervous about the 787 issues.
$72.50 is longer-term support and then again all through the $60's at various levels. IF BA can get the 787 issues resolved and put this behind the company, the stock should have a clear shot at $100, once it trades above $80 per share.
Disclosure: I am long BA.