Seeking Alpha
What is your profession? ×
Long/short equity, special situations, value
Profile| Send Message|
( followers)

Shares of Boeing (NYSE:BA) jumped up last Thursday after analysts at Canaccord Genuity issued a positive research report on the prospects for the firm.

I think Canaccord's upbeat research report comes a bit late after very strong momentum over the past year. I would be a bit more cautious and therefore remain on the sidelines based on valuation concerns.

Upbeat Analysts

Canaccord's analyst Ken Herbert initiated a buy rating on Boeing, with a $140 price target, suggesting some 19% upside from current levels.

Herbert sees potential for BA to continue to benefit from strong industry fundamentals, which should result in further upside to current production levels. Improved cash flows and cash deployment are key drivers for the stock, according to him.

Notably a run-up in the 787 Dreamliner production should be the driver behind revenue growth.


Boeing ended its second quarter with $14.3 billion in cash and marketable securities. Total debt stood at $9.6 billion, for a net cash position of $4.7 billion.

Revenues for the first six months of the year came in at $40.7 billion, up 3% on the year before. Net earnings rose by 16% to $2.2 billion.

Boeing sees full year revenues between $83 and $86 billion. Full year earnings are seen around $3.9 billion, as core earnings are seen around $4.8 billion.

Trading around $118 per share, the market values Boeing at $89 billion. As such, operating assets of the firm are valued around $84 billion. This values operating assets of the firm at 1.0 times annual revenues and 21-22 times GAAP earnings.

Boeing pays a quarterly dividend of $0.485 per share, for an annual dividend yield of 1.6%.

Some Historical Perspective

Over the past decade, shares of Boeing have seen great returns. Shares rose from $40 in 2004 to highs of $100 in 2007. Shares fell to lows of $30 in 2009 amidst the financial crisis, to recover to highs around $120 at the moment. So far this year, Boeing's shares have risen some 56%.

Between 2009 and 2012, Boeing has increased its annual revenues by a cumulative 20% to $81.7 billion. Net earnings tripled to $3.9 billion, in the meantime. Note that the share base increased by 8% over the time period.

Investment Thesis

Despite the well-documented issues with the 787 Dreamliner, Boeing has made a lot of progress in recent times, which is now translating in stock price gains. Underlying these returns are the solid deliveries of the narrow-body 737, which sees huge demand given the importance of lower operating costs within the airline industry.

The commercial aircraft business performed really well again over the past quarter, as deliveries were up by 13% to 169 planes. Note that 116 planes of these deliveries where 737s. Revenues rose by 15% to $13.6 billion, as average selling prices rose to $80 million per plane. Operating margins rose by 50 basis points to 10.7% as well.

Defense, space & security revenues came in flat at $8.2 billion, while operating margins rose by 40 basis points to 9.5% of revenues.

Note that the backlog saw a steady increase as Boeing booked $40 billion in new orders, boosting the total backlog to $410 billion, of which $338 billion in commercial backlog. At the current production and revenue rate, this represents 6.2 years of backlog, marking a very high backlog with some 4,800 planes.

The backlog for the defense business actually fell slightly to $51.5 billion, representing merely 1.6 years of total backlog.

So the focus is on the 787 which is understandable. The size of the plane alone is generating huge publicity, while the many documented incidents continue to cause some serves among some investors. Note however that 70% of current deliveries are the 737s which offer huge economies of scale even at transatlantic flights, having the potential to be the 'working' engine of Boeing going forwards, even when undermining the competitiveness of the 747.

As such Boeing is moving along just fine. The commercial activities are gaining in relative importance, something investors clearly like with strained defense budgets. Some 62% of total revenues are generated from commercial aircraft deliveries, while the order-to-delivery ratio came in at an incredible 2.8 over the past quarter, implying the total backlog is still rising rapidly.

Almost a year ago, in late October of 2012, I last took a look at Boeing's prospects. At the time, shares were trading around $70 per share, when I though the production ramp-up and strong backlog should boost future returns.

At the time Boeing was trying to boost production, although investors had some concerns amidst production delays. As we have seen quite a bit of supplier consolidation in recent times, like Boeing urged its suppliers to do, production has been increasing and operating margins have improved. Shares have seen an incredible run-up, of nearly 70% over the past year. Investors are now seeing the benefits of the production ramp-up, boosting operation cash flows. With the increased proceeds, Boeing hiked its quarterly dividend by nearly 10% to $0.485 per quarter, as it repurchased $1 billion shares over the past quarter.

These high payouts to investors, are already priced in given the massive returns over the past year. While I like the strong backlog, the growing importance of the commercial activities and the strong cash flow generation strengthening the balance sheet, I am cautious. The valuation at around 21-22 times earnings is more than fair after this year's strong momentum.

I remain on the sidelines, based on the valuation and momentum concerns, while the long term prospects still looks rosy.

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.