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Boeing (Ticker BA) is an aerospace giant and is a dominant player in its industry and it enjoys significant barriers to entry.

I used Yahoo finance data in table 1 below that gives forward looking analyst expectations. I also used Stock Investor Pro (AAII Website has details regarding this Stock Investor Pro software) to obtain company data. Past 5 years' growth rate of BA is an impressive 11.6%. The next 5 years growth estimate is 10.4%, not a whole lot different from past 5 years. Please note that 5 yr growth estimates are notoriously volatile.

Table 1: Analyst forecast for BA on Feb 18, 2014

Using three years of near term EPS analyst forecasts and a long-term analyst forecast growth rate of 10.4%, Boeing's valuation is about $112. The valuation model shown in table 2 shows a cost of capital (required return) of 10% and a long-term nominal GDP rate of 4% used in the AEG model (Abnormal Earnings Growth model). Using current market price of $130 one can reverse engineer long-term growth rate embedded in the stock price. As shown in table 2, imputed long term growth rate obtained is 1.61%. This appears lower than long-term GDP growth rate of 3.5% or 4%.

Table 2: Valuation using EPS estimates for BA (Feb 18, 2014)

(click to enlarge)

The back calculated AEG growth rate of 1.61% is reasonable and lower than long term GDP growth rate or even industry growth rate for a dominant company such as Boeing with high barriers to entry.

Table 3 shows the expectations built in to the current market price. About $12 or 9.2% of market price (BA at $130) is obtained from long-term forecasts. This suggests that the stock is not overvalued at these levels. Table 4 shows abnormal earnings growth rate sensitivity to the valuation of Boeing's stock price. Note that abnormal earnings growth is defined as growth rate that is greater than required return (cost of capital at 10%). In the long-run a company's AE growth will mean revert to zero, unless the company has sustainable competitive advantage over its rivals. Note that if the company's earnings grow at 10% and cost of capital is 10%, there is no additional value created as per this model.

Summary: Boeing's current stock price of $130 has an embedded expectation of low abnormal earnings growth rate. Current valuation reflects this pessimistic scenario already. Boeing's stock could be range bound between $118 and $185 in the next 12 months. I am a buyer of this stock at $118 or below (recent lows in January 2014).

Table 3: Boeing (NYSE:BA) Feb 18, 2014, Value from long-term forecasts is $12

Table 4: Boeing AE (Abnormal Earnings) Growth Sensitivity to Valuation

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. I have no business relationship with any company whose stock is mentioned in this article.

Source: Is Boeing Undervalued At $130?