Investors in Boeing (BA) continue to fly high this year as the airplane manufacturer is making progress in converting its huge backlog into actual revenues and earnings. This is reason enough for analysts at Jefferies to remain upbeat about the firm's prospects.
While these improvements, combined with margin expansion are to be applauded, I am a little more cautious given the very strong momentum in 2013 already.
Jefferies Remains Upbeat
Analyst Howard Rubel reiterates his "Buy" rating for Boeing. On the back of the strong momentum with shares up 76% year to date, he raises the price target by forty-one dollar to $165 per share. The new target suggests nearly another 25% upside from current levels.
Rubel still sees Boeing as being positioned to generate earnings per share growth of about 10% per year through 2017. This growth should come on the back of a renewed and expanding Commercial Aircraft portfolio. Rubel now sees core earnings of $7.50 per share next year, increasing towards $8.10 per share in 2015.
The solid earnings growth reflects the increased potential for Boeing to trade at premium multiples given the comparative strong earnings growth.
Back in October, Boeing released its third quarter results. Cash, equivalents and marketable securities stood at $15.9 billion, while debt totaled $9.6 billion, resulting in a sizable net cash position of $6.3 billion.
Revenues for the first nine months of 2013 came in at $62.8 billion, up 5.6% compared to the comparable period last year. Earnings rose by nearly 15% to $3.3 billion. Full year revenues are seen just below $85 billion as "core" earnings are seen at $5.1 billion. GAAP earnings are seen around $4.2 billion.
Trading around $133 per share, the market values Boeing at $100 billion. Excluding the net cash position, operating assets are valued around $94 billion, the equivalent of 1.1 times annual revenues and 22 times GAAP earnings. The valuation multiples come down to 18-19 times earnings when looking at Boeing's "core" earnings.
Boeing's quarterly dividend of $0.485 per share provides investors with an annual dividend yield of 1.5%.
Some Historical Perspective
Between 2004 and 2007, Boeing has seen its share price more than double to little over $100 per share in 2007. Shares fell to lows of $30 during the crisis in 2009 but have recovered. It has to be said, but momentum in 2013 so far has been phenomenally strong. Shares rose from $75 in January to current levels around $133 per share.
In recent years, Boeing has steadily grown its revenues by a fifth between 2009 and 2012, to nearly $82 billion last year. GAAP earnings tripled to $3.9 billion in 2012 as both revenues and earnings are seen up modestly in 2013.
Boeing is facing serious tailwinds in the coming years. The company is finally able to significantly grow production, thereby revenues and earnings as it starts to make progress in converting its huge backlog into actual dollars.
On top of these favorable conditions to operate within, Boeing is furthermore happy to see US states competing with huge incentives to built future factories. Boeing already announced that it might invest upto $10 billion for a new 4.2 million square feet factory, yet it wants to buy the land at no or very low cost, while being eligible for many incentives. Given the still dismal state of employment in some states, legislators are competing to attract Boeing, offering billions in incentives in the meantime.
Back in October, when Boeing released its third quarter results, I last took a look at the firm's prospects. The very strong third quarter results, which indicate Boeing's progress to turn backlog into revenues fueled momentum on top of the performance so far this year. Despite high profile issues with the 787 Dreamliner, the backlog remains high and production increases are scheduled in the coming years. This provides solid growth at a great visibility combined with further prospects for margin improvements. The fuel economics, continue to make the plane a very desirable model among its customers.
The strong cash flow conversion and solid financial position allow Boeing to boost returns to investors. Boeing's dividend yield of 1.5% per annum, or around $1.5 billion is relatively modest. Yet the company repurchased roughly 7.6 million shares in the third quarter, at a pace of 4% per annum, returning some 5.5% to its shareholders.
Despite all this great news, I am a bit more cautious. The significant momentum has priced in the progress in growing operations, margins and increasing cash flows to shareholder already. Also note that Boeing partially itself attributes to the momentum, aggressively repurchasing its own shares.
The very long term fundamentals are being supported by the solid backlog, yet prospects for short to medium term returns are a bit more subdued on the back of the very strong momentum. I remain on the sidelines.