Battery problems with the Dreamliner and the sequestration of federal funds have not stopped Boeing (BA) from moving to new highs. This does not surprise me. The battery issue is a technical problem that will, in time, be solved. The fleet may be grounded for a while longer but eventually it will be airborne again. The sequestration was long anticipated and the impact will be minimal. Long term, there will be reductions in defense-related spending. This is already baked into expectations.
The Dreamliner uses lithium-ion batteries. In January, two incidents occurred in which the battery overheated, emitting smoke and fumes. The cause of the overheating has not been determined. However, according to a report in Bloomberg, Boeing has redesigned the battery which includes new components to minimize potential short-circuits, battery insulation between cells to halt the spread of fire, and a new heat-resistant case and venting system. The battery enclosure will ensure that fire can't develop inside, according to Boeing. The voltage range of the batteries, made by Kyoto, Japan-based GS Yuasa Corp. (6674), will also be limited.
The Federal Aviation Administration has already given its blessing to the battery fix. It remains to be seen if this fix is a band-aide that will ultimately result in a redesigned product. The pipeline for Boeing products remains strong with orders in place to keep production going for years to come.
Though the market for large wide-bodied commercial jets is a duopoly of Boeing and Airbus SAS, the competition in this market is fierce. Airbus recently beat out Boeing with a deal to supply Indonesia's PT Lion Mentari Airlines with 234 planes worth $24 billion at list price. On the other hand, EasyJet Plc's CEO said Boeing "stands a realistic chance of winning a large fleet order to reclaim a customer that it lost to Airbus SAS more than a decade ago." In another example, SpiceJet Ltd (SJET), the Indian discount carrier may switch from an all-Boeing fleet to Airbus. Last week, it was reported that Boeing won a $15.1 billion order from Ryannair Holdings Plc (RYA). The two companies go tit-for-tat on orders.
In January, the company provided guidance below analyst expectations. Analysts polled by Thomson Reuters estimate EPS for the year ending December 2013 to be in the $6.17 to $6.66 range. However, the company's guidance is for GAAP earnings in the $5.00 to $5.20 range on sales of $82b to $85b. Analyst revenue estimates range from $81,390 million to $86,675 million and average $84,158.40 million.
In the fourth quarter, sales grew by 14% to $22,302 million from $19,555 in the year-ago quarter. Analysts see sales in the first quarter declining to somewhere in the $18,165 million to $20,280 million range.
Earnings per share declined to $1.28 in the 4th quarter from $1.84 in the year-ago period or 30%. Expectations are for first quarter earnings in the $1.24 to $1.72 range with an average estimate of $1.51.
Gross margins declined to 16.0% in 2012 which is significantly below 2011's reported margin of 18.7% and the company's five year average of 17.72%. The cost of goods sold increased in 2012 by 22.9% whereas sales increased by 18.9%. Operating margins were also squeezed and dropped to 7.7% from 8.5% in 2011. Operating expenses increased by 19.9%.
The balance sheet remains strong. The company has $10,341million in cash against $8,973 million of long term debt. Long-term debt to capital is 60.5% and long-term debt to equity is 152.9%. With free cash flow of $5,805 million, debt is manageable.
Boeing pays an indicated dividend of $1.94 per share after raising the quarterly payout by 10% to $0.485 per share. The company also has a share buyback program where they expect to repurchase $1.5 billion to $2.0 billion during the current year. The buyback may yield about 5.0%. The buyback coupled with the dividend could provide a total yield to stockholders of about 7.0%.
Boeing is a very profitable company with a return on invested capital of 73.58% and a cash return on invested capital at 38.86%.
Valuation is always an issue. The following chart provides comparisons with industry medians and my own estimate of appropriate multiples.
Boeing is trading at the top of its 52-week trading range. This is driving the metrics into new territory. By my estimate, Boeing has an enterprise value to EBITDA ratio of 8.47 but its free cash flow yield is nearly 9.0%.