Modeling Boeing's Share Price

We continue modelling share prices of companies from the S&P 500 list. At Seeking Alpha, we have already presented models for the following companies: IBM, DOV, PG, DD, APD, CVX, DVN, HAL, MSFT, COP, and XOM. Here we model Boeing's (BA) share price.

Our pricing model is simple. We assume the presence of a linear link between a share price and the difference between various components of CPI. The intuition behind the model is simple; a higher pricing power for a given subcategory of goods and services, and thus related companies, is expressed in a faster increase in corresponding stock prices. In the first approximation, the deviation between relevant price indices is proportional to the ratio of the pricing powers. The presence of sustainable (linear or nonlinear) trends in the differences, as found in (Kitov, Kitov, 2008; Kitov, Kitov, 2009ab) allows predicting the evolution of the differences, and thus the deviation between prices for corresponding goods and services. The share prices have to follow upwards.

So, there exist sustainable trends in the differences between various subcategories of consumer (and also producer) price indices. We consider the sustainability as an equivalent to the possibility to describe such (linear of nonlinear) trends by simple functions of time. Figure 1 shows that the difference between the headline CPI less food, shelter and energy, fseCPI, and the index for transportation, T, can be approximated by a simple time function:

dCPI(t) = fseCPI(t) - T = a + bt (1)

where dCPI(t) is the difference, a and b are empirical constants, and t is the elapsed time. Between 1988 and 1999, the linear trend has a slope +1.24, and from 2002 to 2008 the slope is (-3.75). After 2008, a transition period to a new trend has been observed with very high volatility. It is likely that the spike of 2008 and 2009 should return to the new trend quickly.

Figure 1. The difference between the headline CPI less food, shelter and energy, fseCPI, and the index for transportation, T.

After preliminary investigations we have found that the best pricing model states that a share price, BA(t), can be approximated by a linear function of the difference between the fseCPI and T:

BA = -2.5*(fseCPI - T) +105; 1999-2009

BA = 2.0*(fseCPI - T) - 15; before 1999 (2)

Figure 2 demonstrates the accuracy of the model. Despite several large deviations, the predicted price well describes the observed one (adjusted for dividends and splits) in shape and amplitude. Because of short-period oscillations in the original price, we have smoothed it with a12-month moving average, MA(12).

Figure 2. Comparison of the observed and predicted BA (adjusted for dividends and splits) share price.

References

Kitov, I., Kitov, O., (2008). Long-Term Linear Trends In Consumer Price Indices, Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(2(4)_Summ), pp. 101-112.

Kitov, I., Kitov, O., (2009a). A, MPRA Paper 15039, University Library of Munich, Germany fair price for motor fuel in the United States

Kitov, I., Kitov, O., (2009b). Sustainable trends in producer price indices, Journal of Applied Research in Finance, v. 1, issue 1.

Disclosure: no position

Comments

[Mad Hedge F...:]

To say that investors are disappointed by the umpteenth outsourcing caused postponement in the 787 Dreamliner is an understatement. They took the Dow stock down 23% from $53 in days. In fact, long suffering shareholders have been pummeled by a torrent of bad news, with the cancellation of the Pentagon’s futuristic $160 billion Land Warfare Weapons Program and Quantas yanking an order for 15 Dreamliners. But I’m a firm believer in buying when there is blood in the street, and I see bucketfuls. BA is selling at 8.7 times earnings, a huge discount to competitors Lockheed Martin (LMT) at 10.5 times and Raytheon (RTN) at 10.9 times. It has $3.3 billion in cash, a 4% dividend, and an increasingly scare A+ rating on its debt. BA’s immensely profitable defense business still accounts for 52% of revenues. When the super fuel efficient Dreamliner does come through, the three year, $151 billion order backlog for 890 planes will deliver a huge kicker for earnings. Its main competitor, Airbus, does have the minor problem in that its planes keep falling apart fully loaded with passengers. If you can get BA under $40, you’d be getting a best of breed company at a mongrel price.

Jul 02 11:27 AM

[Ivan Kitov:]

Considering the depth of fall in 2008-2009, the fact that the fall has ended and the price is on a recovery trajectory - I agree that potential growth in share price is large. A return to the 2007 level is possible.


On Jul 02 11:27 AM Mad Hedge Fund Trader wrote:

> To say that investors are disappointed by the umpteenth outsourcing
> caused postponement in the 787 Dreamliner is an understatement. They
> took the Dow stock down 23% from $53 in days. In fact, long suffering
> shareholders have been pummeled by a torrent of bad news, with the
> cancellation of the Pentagon’s futuristic $160 billion Land Warfare
> Weapons Program and Quantas yanking an order for 15 Dreamliners.
> But I’m a firm believer in buying when there is blood in the street,
> and I see bucketfuls. BA is selling at 8.7 times earnings, a huge
> discount to competitors Lockheed Martin (seekingalpha.com/symbo...)
> at 10.5 times and Raytheon (seekingalpha.com/symbo...) at
> 10.9 times. It has $3.3 billion in cash, a 4% dividend, and an increasingly
> scare A+ rating on its debt. BA’s immensely profitable defense business
> still accounts for 52% of revenues. When the super fuel efficient
> Dreamliner does come through, the three year, $151 billion order
> backlog for 890 planes will deliver a huge kicker for earnings. Its
> main competitor, Airbus, does have the minor problem in that its
> planes keep falling apart fully loaded with passengers. If you can
> get BA under $40, you’d be getting a best of breed company at a mongrel
> price.

Jul 02 11:38 AM

[desicon:]

In the commercial airlines sector 787 is a better product than 380. I agree once the production problems are taken care, 787 will be a cash cow for a long time. I predict airlines will soon realize 380 to be commercially unviable and switch to 787. Southwest proved passengers prefer direct flights, 787 will become the dominant equipment for connecting international destinations directly. With better fuel efficiency all international airlines will want 787 to be part of their fleet. With 787 airlines can offer new market segments and avoid big and busy airports further eroding the need for 380.

Jul 02 04:56 PM

[Yellowhair148:]

I do believe that BA has a management credibility problem. One week before the latest delay the TOP Leadership in Paris for the airshow said that the 787 could fly then if they wanted it to. They had to know of the problem and still deceived shareholders and the public anyway. The CEO and the other CEO's formerly from GE (Immelt, Nardelli HD Chrysler, Mcnerney MMM and Stonecipher MDC had BA reigns prior) seem to have a large problem with credibility and shareholder value. IMHO BA missed the boat terribly when they let a true airplane guy (Mulally) get away. The current crop of CEO's from GE seem to be considerably more concerned about their own wealth not the investors. They also seem to have a problem with the reliable information. I think that we are not done seeing delays on the 787. Outsourcing almost the entire aircraft at this point looks to be a total disaster. The fact that they are buying Vought facilities says that it may be spinning out of control and ramping up could be a problem.

Jul 04 02:06 PM