On Sunday, November 17th at 3:25 AM, Seeking Alpha's Market Currents released the following news on Boeing:
Boeing launches 777X with deals worth $95B
- In what is the largest product launch by dollar value in commercial jetliner history, Boeing (BA) has officially unveiled the next-generation 777X at the Dubai Air Show.
- Boeing has received bookings and commitments worth $95B at list prices for 259 jets from four customers in Europe and the Middle East.
- Emirates has ordered 150 airplanes with an option for 50 more, Lufthansa wants 34 aircraft, Qatar Airways 50, and, as noted already, Etihad Airways 25.
- The deals also represent a windfall for GE (GE), which is supplying the engines for the plane.
- The 777X family includes two models: the 777-9X and the 777-8X.
- The 9X will seat over 400 passengers and have a range of more than 8,200 nautical miles (15,185 km). The aircraft will have the "lowest operating cost per seat of any commercial airplane," Boeing says.
- The 8X will seat 350 passengers and offer a range exceeding 9,300 nautical miles (17,220 km). (PR)
- Meanwhile, Boeing has obtained an order for up to 111 737 jets from flydubai in a deal worth $11.4B at list prices. (PR)
Boeing previously announced in its third-quarter earnings report that it would increase 787 Dreamliner production from 10 per month to 12 per month by 2016 (Read the Seeking Alpha transcript by going here). The aerospace giant further intends to increase 787 production to 14 per month by the end of the decade and has orders for 890 of those planes that it has yet to build. With a backlog of orders worth $415 billion, Boeing has been ramping up its production of big commercial aircraft and is expected to produce some 3900 planes within the next two decades. With the new $95 billion in orders it just received, the company is poised to surpass the half a trillion dollar mark in back orders. With all this positive news, what should an investor do now? Well let's go to work and see how Boeing's financial numbers are shaping up from a free cash flow point of view.
In this article I present a real time quantitative analysis of Boeing that demonstrates the power of free cash flow in the investment process and I give an opinion on how an investor should act based on my research.
This analysis will use the following six free cash flow ratios:
- Price to Mycroft Free Cash Flow
- Mycroft/Michaelis Growth Rate
- Free Cash Flow Payout Ratio
- Free Cash Flow Reinvestment Rate
Those new to this analysis can find an introduction by going here that will explain in detail how each of these ratios is calculated. When used together, these unique ratios will generate a quantitative picture of a company's underlying fundamentals, including strengths and weaknesses.
The "2014 Mycroft Free Cash Flow Per Share" estimate in the table above is generated by taking the trailing twelve months (TTM) free cash flow result for Boeing and then adding my Mycroft Michaelis Growth Rate into the equation in order to generate forward looking estimates for 2014. That growth rate is generated by using my FROIC ratio (Free Cash Flow Return on Invested Capital). Basically FROIC tells us how efficient operations are as it zeros in on how much free cash flow is generated for every $1 of total capital employed. Boeing has a FROIC of 48%, which means that for every $100 of invested capital, it generates $48 in free cash flow. Now my Mycroft/Michaelis Ratio takes that 48% and multiplies it by the firm's free cash flow reinvestment rate. The reinvestment rate that I use is a free cash flow reinvestment rate instead of the standard one used by analysts that simply uses net income:
Free Cash Flow Reinvestment Rate = 100% - (Free Cash Flow Payout Ratio).
Free Cash Flow Reinvestment Rate = 100% - (Total Dividend/Total Free Cash Flow).
By replacing net income in the payout and reinvestment ratios with free cash flow, I am thus able to make my analysis more precise by incorporating capital spending (Cap Ex) into the equation.
Therefore from this we can determine that Boeing has a reinvestment rate of 81% and went on to use 19% of its free cash flow to pay out its dividend. Thus by taking 48% (FROIC) x 81% = 38.88% (rounded off at 39%). From there we add the dividend yield of 1.5% (rounded off at 2%) and we have a Mycroft/Michaelis growth rate of 39% + 2% = 41%.
Boeing's Mycroft Free Cash Flow per share of $14.69 was generated by taking its TTM free cash flow per share and multiplying it by (100% + 41% or 1.41). Once we have our result, we then take its current market price of $136.08 and divide it by $14.69 and get a Price to Mycroft Free Cash Flow result of 9.26. I consider a Price to Mycroft Free Cash Flow per share result of less than 15 to be good for purchase, and anything under 7.5 to be excellent.
The higher you go above 15, the more overvalued a company becomes. I use a Price to Mycroft Free Cash Flow per share result of 22.5 as my sell price, and 45 as my short price.
An appropriately priced stock should trade around a Price to Mycroft Free Cash Flow per share result of 15. This benchmark result was determined by backtesting.
Buy (opinion) = A Price to Mycroft Free Cash Flow per share result of less than 7.5 is considered excellent (50% below the initial Hold level), and anything under 15 is attractive.
The result I give as my Buy opinion in the table above uses a Price to Mycroft Free Cash Flow per share result of 7.5.
Hold (opinion) = 15 to 22.5 (I use 15 in the table).
Sell (opinion) = 22.5 or higher (50% above the initial Hold level). (I use 22.5 in the table).
Short (opinion) = 45 or greater. The Price to Mycroft Free Cash Flow per share result of 45 was determined by going back to the peak of the market (in the year 2000) and averaging the Price to Free Cash Flow per share results for the key players at that time. (I use 45 in the table).
Therefore in the table above you will see that Boeing with a Price to Mycroft Free Cash Flow number of 9.26 is very attractive right now.
The CapFlow ratio result that you see in our first table above is an original ratio I created in order to tell me how much Capital Spending is used as a percentage of Cash Flow. A result of less than 33% is considered ideal and with Boeing coming in at just 19%, means that 81% of the company's cash flow is actually free cash flow and can be used to buy back stock, which I am a big fan of.
In conclusion Boeing has a lot going for it as it is innovating the entire commercial airline industry by introducing its new fleet of hi tech airplanes that are cutting edge. The greatest benefit of its new offerings is that it can reduce airline's operating costs by as much as 20% as its planes are 20% more fuel efficient to fly. Since 80% of the operating cost in the airline industry is fuel, Boeing is doing for the airline industry what Toyota (TM) has done for the automotive industry, when it introduced its Prius model. As a result Boeing has enough back orders to keep it busy and very profitable for decades to come.
In conclusion there are very few companies on the stock market that you can buy and hold with confidence and Boeing is definitely one of them. Even though its market price has gone up substantially this year, it is my belief that we are just at the beginning of a multi-decade bull run in Boeing and I have made it the largest holdings in my client portfolios. The only potential downside that can hurt the stock would be another grounding of the 787 fleet due to battery issues. Other than that I see Boeing's stock ready for some open field running coming up as its free cash flow numbers are just incredible.