Prior to 2013, Boeing (BA) was one of the cheapest stocks in the market with so much growth ahead. After having an amazing year in 2013, many people felt like Boeing was getting ahead of itself. Now that the company had some sort of a correction after the latest earnings report, Boeing might be getting cheap again.
What was so bad with Boeing's results?
Actually Boeing's results were pretty solid. The company had a solid year both in defense and commercial businesses where it continues to enjoy a huge backlog ($441 billion) that will almost guarantee growth for many years to come. Boeing's 2013 revenues and earnings were all-time highs, and furthermore, the company showed improvements in its margins, cash flow and returned a lot of value to investors.
The commercial business delivered a record of 648 new planes and generated $53 billion in revenues while receiving net orders of 1,355 additional planes. Despite the ongoing budget cuts in governments of many developed nations, Boeing's defense business delivered more aircraft, more satellites, achieved higher operating margins and generated $33 billion in revenues. When we look at Boeing's 2013 performance, we are looking at the company's best performance ever in the history.
The investors were generally happy with Boeing's 2013 performance; however, they were unhappy with the company's guidance for 2014, which was calling for $7.00-$7.20 in net earnings, while the analysts were looking for $7.50-7.60. Considering that Boeing is authorized to spend about $10 billion to repurchase its shares in order to boost its earning per share figures high, many analysts were looking for better numbers.
Did Boeing just become a bargain?
Boeing's relatively conservative guidance for 2014 should not worry the investors too much. Boeing is one of those companies that consistently give out soft guidance figures and beat them easily. I checked figures going back all the way to 2010 and I have not found a quarter where Boeing did not beat the estimates. Out of the last 12 quarters, Boeing beat analyst estimates 12 times and it will continue to do so. For example, in the fourth quarter of 2010, Boeing earned $1.56 per share against analyst estimates of $1.12 per share. For 2011, Boeing guided for $3.80-4.00 while the analysts were looking for $4.55 and the company actually ended up earning $5.31 per share. The next year, the company guided for $4.05-$4.25 again and this time it earned $5.11 per share. In the beginning of 2013, Boeing guided for $5.00-5.20 per share while achieving $5.94 per share. I am surprised that investors have overreacted to something Boeing does pretty much every year.
Boeing is currently production-constrained rather than demand-constrained. The company can grow as fast as it can ramp-up its production levels, especially in the commercial business. The defense business is a little trickier but Boeing's defense business has excellent execution and strong margins, which tells me that the future will not be any different.
Many airlines in the developing world are growing with the accelerated globalization and many airlines in the developed world are replacing their older planes with newer and more fuel-efficient planes. In this sense, plane industry is a lot like car industry where a lot of focus is shifting towards being energy-efficient. Because the barrier of entry is so large in Boeing's industry, there isn't much of a competition. This is why the company can afford to build a large backlog without losing many customers in the process.
Between 2010 and 2013, Boeing's net earnings grew from $3.31 billion to $4.58 billion, an increase of 39%. During this period, the company's earnings per share grew by only 33% because of the increased dilution. Now, Boeing is moving forward in order to tackle the dilution problem and hoping to reduce the share count in the coming years.
With the help of stock buybacks and increased production, Boeing's net earnings will be growing at a rate of 10% to 20% per year for the next 5 years. If we take the midpoint of 15%, this is a solid growth rate for a blue chip company. Not only will Boeing be able to grow its revenues strongly, but it will also be able to improve its production efficiencies, which will improve the company's margins and overall profitability. Even if Boeing doesn't beat its guidance this year, it will be earning about $7.10 in 2014, followed by $8.16 in 2015, $9.38 in 2016 and $10.79 in 2017 with a growth rate of 15%. At the current price, we are looking at a forward P/E of 11 for 2017 and the company's growth probably won't stop there either.
If exclude Boeing's $15.3 billion in cash and liquid assets, the company could be even looking at a single digit forward P/E before the decade is over. Many people were looking for a correction to be able to buy more shares of Boeing and they might have finally got their chance.