Boeing: Great Company, Little Upside

| About: The Boeing (BA)

Boeing (NYSE:BA) has enjoyed a run up during the last few months. The stock is up 26.5% year-to-date. BA has recently reported its first quarter earnings that have beaten analyst estimates (analyst estimates sourced from Yahoo! Finance) by 16.9% and were warmly embraced by investors. BA has been trading in a tight range for the whole year 2012. Now the stock is in a rally mode. It could be approaching its all-time highs. Is this momentum sustainable?

Boeing gets its revenue from two main segments: commercial airplanes segment and defense, space & security segment. In its 2013 guidance, BA states that it expects commercial airplanes to deliver $51-$53 bln of revenue at a 9.5% operating margin. BA expects defense, space & security segment to score $30.5-$31.5 bln of revenue at a 9% operating margin. To help the stock rise further, BA has to outperform its own guidance either on the commercial airplanes side, or on the defense side. Boeing states that it sees defense budget pressures in U.S. and other developed markets. While BA and its defense competitor Lockheed Martin (NYSE:LMT) have survived the first sequester wave, it is hard to predict what would follow. That's why I think that BA would focus its effort on selling more commercial airplanes. Surely, that would benefit the stock. The question is whether it is possible or not.

Boeing has scored 260 net orders in 2013. The most popular planes are the cheapest ones - the 737 family. Prices for those planes in 2012 ranged from $74.8 mln to $107.3 mln for different modifications. Planes are bought by airlines all over the world, but the domestic market plays a significant role. Both major and regional airlines' stocks have enjoyed a nice 2013. Delta Air Lines (NYSE:DAL) is up 52% YTD, US Airways (LCC) has gained 31% YTD, United Continental (NYSE:UAL) is up 40% YTD and Spirit Airlines (NASDAQ:SAVE) has gained 64% YTD.

The stock performance is good, but does this mean that airlines would be purchasing more aircraft than planned in hopes of growth. The fastest growing airline, SAVE, does not have any Boeing plane in its fleet. It flies completely on Airbuses. Other airlines use both Boeings and Airbuses. Airlines are not debt free. For example, LCC has $4.89 bln in debt while UAL has $13.17 bln in debt. I don't think that regional airlines would purchase more, either. Most regional airlines do not use Boeings. Southwest Airlines (NYSE:LUV) does use Boeings and has ordered 150 Boeing 737 MAX planes in December 2011 (sourced from LUV's annual report). The delivery is expected to take place in 2017.

Stock is bought for three main reasons. These reasons are value, growth and income. I do not see Boeing as a growth stock. It is not the company's fault - it is extremely difficult to be a growth story while being a giant in a mature market. At current prices, BA's dividend yields 2.06%. This is not enough to make income players buy the stock like mad. BA trades at a 17.69 P/E and a 13.18 forward P/E. Its defense competitor LMT trades at 11.78 P/E and 11.30 forward P/E. I don't see Boeing as an overvalued company. However, I think that value players would prefer to see BA price drop significantly before considering it a bargain. Analysts' mean target price for BA is 102.62. This is 8% higher than current prices. I think that the target is achievable, but it is not enough to convince me to take a position in BA. The world economic recovery is fragile, sequester consequences are undetermined. At current prices, the size of the possible risk is roughly equal to the size of the potential profit.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.