From the start of 2013, Boeing (BA) has been in the news. The positive and negative news have driven the market price of the stock high enough to make me ponder and analyze the sentiments surrounding the company. The company has been accused of misrepresenting the facts in an effort to inflate its share price. The 7th Circuit US Court of Appeals has dismissed the accusations. The Dreamliner drama should have pushed down Boeing's price in the stock market but the stock price has actually gained 12% since the start of 2013 due to the Stock Buyback news of the company. The news has proved to be another catalyst for a stock price hike. In this article, I will discuss the various aspects of the company and whether it is worth risking your money on or not.
Boeing is the world's leading aerospace company and the largest manufacturer of commercial jetliners and military aircraft combined. The different segments in the company are: Commercial Airplanes, Integrated Defence Systems and Boeing Capital Corporation, which provides financial solutions facilitating sale and delivery of Boeing commercial and military aircraft, satellites, and launch vehicles.
The 'Dreamliner' Deal
The company and the investors had many hopes clinging to the new Dreamliner. The company's stock price soared as the date of Dreamliner's first flight drew nearer. The 787 Dreamliner was supposedly going to make its first flight in June 2009. However, in April of that year, the plane failed a wing stress test. The plane failed another stress test in May, but Boeing did not announce the cancellation of the June flight until one week beforehand. It announced an indefinite delay in its delivery schedule at the same time. In the following two days, shares of Boeing shed 10% of their value in the market followed by the subsequent suit bringing securities fraud charges against the company for claiming the plane would be ready to fly when it seemed Boeing knew it would not.
The judge dismissed the accusations and the 787 made is first flight after more than 3 years of delay from the company's original schedule and reported heating issues in the battery. The plane is currently grounded worldwide while Boeing tries to get modifications to the aircraft's lithium-ion battery system approved by regulators.
The dark future for Dreamliner
As per a report on Reuters, the Federal Aviation Administration is considering the shortening of the flight time for the new and altered 787 Dreamliner, with revamped battery system. This time curtailment will be levied upon some of the routes, especially some of the trans-oceanic flights that were a primary selling point of the aircraft. This will result in lesser flights and deeper cut into the fuel-savings Boeing hoped to achieve using the 787 on longer voyages.
The sky high industry outlook Analysts Estimates
The 2013 outlook for the aerospace suppliers calls for continued growth driven by a roughly 10% increase in large commercial airplane deliveries, a modest improvement in regional/business jet deliveries and 5-10% growth in the higher-margin commercial aftermarket. The aerospace Industry is expected to reach a sky high level in the coming years due to the rising air fares, rallying oil prices and hiking demand for air travel. As per Air Bus Global Market Forecasts, the traffic growth in Advanced and Emerging air transport is expected to grow at annual rate of 5.1%.
Reuters cited an unnamed source familiarly with the matter saying:
"Boeing has apparently found a way to fix the problem in a method that involves increasing the space between the cells so as to stop them from overheating."
It is expected that the company will fix the "Dreamliner" issue by the end of April of 2013. The investors and Analysts are displaying positive sentiments as the date nears. UBS AG Analysts raised their target price from $72 to $75. However, the company is trading high above analysts' estimates. An article on Value Walk disclosed that the some analysts are expecting Boeing to hit $88; Jefferies Group (JEF) has a price target of $87 whereas Sanford C. Bernstein is expecting the company to hit a price target of $98 by the end of this year.
The shares buyback
Boeing pays an indicated dividend of $1.94 per share after raising the quarterly payout by 10% to $0.485 per share, offering a current yield of 2.6%. 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 news is attracting investors and analysts are bidding up the price target. But the question remains. If the share buyback and hiked dividend have temporarily raised the target price of Boeing or are there any structural or fundamental changes in play currently?
Comparing Boeing with its peers, the company's dividend yield after the increase stands at 2.1%, lower than many other players in the industry whereas its debt stands out quite high compared to others. The increased dividend and proposed share buyback might have seemed lucrative to many investors but the sustainability of this high dividend is a big question. Given the high debt to equity ratio of the company, sustaining the payout ratio of 34% can be a daunting task. The company holds a debt of USD 10.41 billion whereas the operating cash flow is quite shy of this amount and was posted at USD 7.51 billion at the end of 2012.
I respect the fact that Boeing is operating in a highly capital intensive industry. The lower dividend yield compared to its peers might be acceptable while considering that fact. But the dividend increase and share buyback are contradicting ideas and raise questions for company's sustainable dividend and the intended message to the investing communities about its future prospects and growth. The point to ponder is if the intent of this news was to bring a hurdle to the falling stock price after the news of Dreamliner being a total flop or the company wants to take the shares away from investors' hands as they expect gold from their future. Most of the investors' sentiments and analysts' estimates incorporate the success of 787 Dreamliner at the time of its flight scheduled in April. If Boeing is unable to put the aircraft to work, the stock price will rally and lose all its heights and charms that it has gained since the start of 2013. Even if Dreamliner is fixed and put to work, the aircraft will not reap what the company expected due to its bans and short flight schedules. I would suggest investors keep their hands off Boeing as it reaches the edge. At this time, Boeing is a risky stock that is a good Sell at least until the middle of 2013.